EO to Raise RMD Age ?!

[urn2bfree]

$15,000 -> 15% marginal tax rate

$20,417 -> 18%

$24,000 -> 22.2%

$36,865 -> 40.7%

$38,706 -> 22%



A married couple with $40K in SS will have the following marginal tax rates, depending on the non-SS income.



$21,733 -> 15% marginal tax rate

$24,000 -> 18.5%

$32,459 -> 22.2%

$56,941 -> 12%

$70,000 -> 22%



See: https://www.bogleheads.org/wiki/Taxation_of_Social_Security_benefits

I am not sure I understand the full effect of this. Or what you are saying.
Is the tax after the number what is taxed on the amount UP to that number or the amount taxed above that number? What do these numbers mean?
And while these rules are mind achingly complex, the use of marginal rates and big percentages only makes them more confusing.
How much actual money difference are talking about? It looks to me like maybe a few hundred dollars, but I confess I don't completely follow it.

 

[gayl]

I think I've got it: if you're under amount between 36,865 or over 38,706 its irrelevant. my pension is around 36k, taxable dividends well over 3k so not in that whatever. someone else was writing up a really really complicated way if stating that in some cases federal tax bumps up a few hundred

 

[NW-Bound]

Yes, the tables show the marginal tax rates above a certain income. The tax rule on the SS distorts the simpler tax brackets, and creates weird effects. But thankfully, the weird effect of 40.7% tax rate for single returns only takes place over a narrow region of 36,865 to 38,706.

For people not accustomed to the marginal rate, it means that when you are in that region, for every $1 extra that you take out of your IRA, you only get to keep 59.3 cents.

But as urn2befree stated, it is helpful to look at the cumulative tax, starting from the first dollar. And the cited article has two graphs to show that, one of which I linked earlier.

Here are these graphs for single and married tax returns. They assume $20K SS for a single person, and $40K SS for a couple.

One can see that the cumulative tax rates keep increasing for more income. For a single person, it is around 14% for income of $40K tIRA + $20K SS.
For a married couple, it is about 13% for income of $70k tIRA + $40K SS.

 

[NW-Bound]

Note to add:

If you can stay within the 0% tax region forever, you make out well. However, if RMD pushes you out into the "tax-paying" group, then it is best to average your withdrawal each year to minimize your tax. And you may need to do that way before the age of 70.

Even if there were no RMD, to face a huge tax bill at the end of your life when you suddenly need $100K's of money for medical reasons is unpleasant. And then, even if you croak without spending anything, your heir may pay through the nose when that inherited IRA distribution is added on top of their earned income.

 

[gayl]

Not wasting any more grey cells on this .... out to a hike. Will have 25% withheld from SSA so I should be good. That 75% additional $$s so whatever I'm left with is great. Guess it would be different if I didn't have a pension with COLA

 

[timo2]

The rest of the EO was focused more on direction to consider ways to provide for 401k arrangements for smaller businesses, which sounds like it might also be good, if it means more people can start retirement savings...ie more money invested in the market.
.

That 401k stuff was more interesting to me also. It potentially would be a private industry replacement for the old myRA scheme.

 

[Helena]

Ironically, a similar bill has been in the Ways and Means committee since December.

https://www.congress.gov/bill/115th-congress/house-bill/4524/text

" J. Mark Iwry, who oversaw retirement policy at the Treasury Department during the Clinton and Obama administrations says a proposal he made under the Obama administration is now part of a bill in Congress that would exempt retirees with $250,000 or less in tax-deferred assets, according to a Barron's article."

https://riabiz.com/a/2018/8/31/trum...-to-scale-401k-servicing-and-dodge-bad-apples


Here is that Barron's article:


Trump Tackles Retirement: What It Means for Your 401(k)

" Without more details on the intent of Trump’s order about reviewing the minimum distributions from 401(k) and IRAs that retirees are required to take at 70 1/2, it is hard to assess the full impact. But there have been past efforts to reassess the rule. Iwry says a proposal he made under the Obama administration is now part of a bill in Congress that would exempt retirees with $250,000 or less in tax-deferred assets, making retirement simpler for a majority of American seniors. A review of the rule using updated actuarial tables could also lead to a very small trim in withdrawal rates based on longevity--something that has been done before."


https://www.barrons.com/articles/trump-tackles-retirement-what-it-means-for-your-401-k-1535738342

.

 

[Dtail]

Yes, the tables show the marginal tax rates above a certain income. The tax rule on the SS distorts the simpler tax brackets, and creates weird effects. But thankfully, the weird effect of 40.7% tax rate for single returns only takes place over a narrow region of 36,865 to 38,706.

For people not accustomed to the marginal rate, it means that when you are in that region, for every $1 extra that you take out of your IRA, you only get to keep 59.3 cents.

But as urn2befree stated, it is helpful to look at the cumulative tax, starting from the first dollar. And the cited article has two graphs to show that, one of which I linked earlier.

Here are these graphs for single and married tax returns. They assume $20K SS for a single person, and $40K SS for a couple.

One can see that the cumulative tax rates keep increasing for more income. For a single person, it is around 14% for income of $40K tIRA + $20K SS.
For a married couple, it is about 13% for income of $70k tIRA + $40K SS.

"Sandyandshirley" wrote up a comprehensive "tax hump" schedule of SS income combined with other income.

 

[MarieIG]

Mike B. post #44 actually links the EO. Much better to read it directly.

 

[braumeister]

post #44 actually links the EO. Much better to read it directly.

Killjoy.

How are we supposed to have a good argument over poorly understood speculations if we actually read the original source?

 

[MarieIG]

Killjoy.

How are we supposed to have a good argument over poorly understood speculations if we actually read the original source?

 

[GravitySucks]

+1

I just never get the anti RMD rhetoric. Initial RMD is what, 3.6%? At a 25% tax hit that’s less than 1% of the nest egg. We were given the tax deduction and tax deferral all those years and now it’s time to pay the piper a small bit. If you don’t "need" the money, just immediately reinvest the funds in a taxable version of whatever they came out of. Or donate to charity.

Everyone wants to use the roads, no one wants to pay the taxes to fill in the potholes.

 

[street]

I would love to see this happen. WOW!

 

[donheff]

Mike B. post #44 actually links the EO. Much better to read it directly.

The White House release does not read like an EO; more like a press release about an EO. I would be interested to see exactly what he tasked Treasury with doing.

 

[Rianne]

Note to add:

If you can stay within the 0% tax region forever, you make out well. However, if RMD pushes you out into the "tax-paying" group, then it is best to average your withdrawal each year to minimize your tax. And you may need to do that way before the age of 70.

Even if there were no RMD, to face a huge tax bill at the end of your life when you suddenly need $100K's of money for medical reasons is unpleasant. And then, even if you croak without spending anything, your heir may pay through the nose when that inherited IRA distribution is added on top of their earned income.

Moderators, can I copy all NW Bound posts and bring them to our CPA next week? Not sure if that's legal.

 

[samclem]

Moderators, can I copy all NW Bound posts and bring them to our CPA next week? Not sure if that's legal.

? Not sure if what is legal--copying his posts or doing as he suggests?


If you want to pay your CPA to read posts, go right ahead.

 

[MarieIG]

Note to add:

If you can stay within the 0% tax region forever, you make out well. However, if RMD pushes you out into the "tax-paying" group, then it is best to average your withdrawal each year to minimize your tax. And you may need to do that way before the age of 70.

Even if there were no RMD, to face a huge tax bill at the end of your life when you suddenly need $100K's of money for medical reasons is unpleasant. And then, even if you croak without spending anything, your heir may pay through the nose when that inherited IRA distribution is added on top of their earned income.

If the money goes towards nursing home care, can that be tax deductible, to offset the tax bill?

 

[NW-Bound]

Oops. I forgot that medical costs, including nursing home cost, can be tax free for the portion over 10% of income.

The IRS says that it has to be for medical reasons, not "custodial reasons" (like assisted living?). I am not sure how the determination is made. Is being "old and weak" a good enough reason, or one needs to have Alzheimer?

 

[NW-Bound]

"Sandyandshirley" wrote up a comprehensive "tax hump" schedule of SS income combined with other income.

Were you talking about the following thread?

http://www.early-retirement.org/forums/f28/social-security-marriage-hump-penalty-88579.html

I missed that thread. The new tax law has changed that quite a bit, and there's now no "marriage hump", but the "single hump" remains.

By hump, I mean the tax rate jumps up way above the 22% rate for a certain income range. It only costs the single taxpayer a few hundred bucks max, so no need to get super upset.

 

[MarieIG]

Oops. I forgot that medical costs, including nursing home cost, can be tax free for the portion over 10% of income.

The IRS says that it has to be for medical reasons, not "custodial reasons" (like assisted living?). I am not sure how the determination is made. Is being "old and weak" a good enough reason, or one needs to have Alzheimer?

I'm thinking a lot of people are routed from hospitals into nursing homes.

By "Googling" I found that there are certain standards for Medicaid to approve coverage, and I suspect, but don't know, that the standards would be the same for deductibility.

 

[Car-Guy]

Killjoy.

How are we supposed to have a good argument over poorly understood speculations if we actually read the original source?

Have no fear. IF anything comes out of this, I seriously doubt that it will have any resemblance to what is being discussed now.

 

[RobbieB]

Yeah. All that was said is "go look at this stuff"

 

[Niuatoputapu]

Yeah. All that was said is "go look at this stuff"

+1

 

[audreyh1]

Note to add:

Even if there were no RMD, to face a huge tax bill at the end of your life when you suddenly need $100K's of money for medical reasons is unpleasant. And then, even if you croak without spending anything, your heir may pay through the nose when that inherited IRA distribution is added on top of their earned income.

Well you do get to deduct a big chunk of those medical expenses. If they are way higher than 10% of your AGI you can deduct what exceeds that 10% from your income.

 

[Independent]

I turned 70 1/2 six weeks ago, so this is my first RMD year.

Sure, from a personal perspective, I'd love to eliminate RMDs entirely.

Similarly, I'd love to have a special tax deduction that applies only to bald males who were born in 1947.

But, if I put my public policy hat on, I understand that the gov't has to get taxes somewhere. Allowing me to save pre-tax money and defer taxes on both principal and earnings until 70+ is a huge tax advantage for savers like me. I don't know how to argue that the greater good is served by providing this tax deal.

I certainly don't know how to argue that the greater good is served by allowing my kids to inherit this attractive tax position.

So, I really can't complain about RMDs starting at 70 1/2.