Life changes after SS and RMDs?

[Midpack]

Instead of an arbitrary 50/50, I always heard to contribute to a 401k at least what it takes to maximize company match, beyond that depends. I was another who was able to contribute 15% to my 401k and still payroll deduct substantially to my taxable account. LBYM since our late 20’s.

 

[W2R]

How much to contribute to taxable vs tax sheltered accounts?

It was easy for me. I contributed the maximum allowed by law to the TSP (=401K), and then put as much or more in my taxable accounts. So, my taxable accounts are bigger although I might have preferred 50:50.

This was because a divorce at age 50 left me with less than nothing, so I was "on the fast track" to building my retirement portfolio, you might say.

 

[jollystomper]

Yep. If I had it to do over again I'd put less in 401(k)s and more in after-tax. I don't think I realized till I was very close to retirement that EVERYTHING coming out of pre-tax is ordinary income, even LT gains and dividends. For me, the whole song and dance of "you'll be in a lower tax bracket when you retire" is a lie, due mostly to that but also due to taxes (Federal AND State ) on my SS and IRMAA surcharges.

"Unfortunately" for us, We were never eligible for Roth IRAs until after I retired, so our after tax options were limited. Megacorp did offer an after tax 401K options (after one maxed out pre-tax), but it also came with the caveat that any money put into that was not guaranteed.

I knew well before I retired that our future RMDs would be large. But I have always seen it as a "first world" problem. In any case, a lot of our 401K contribution from income was in years when we were in the 28% or higher tax brackets, so at worst we might break even.

Sometimes I think the issue is less the amount one will be taxed, and more what one perceives the tax money will be used for . DW never focused on the income tax we paid until it jumped one year from less than $30K to over $50K. I remember how shocked she was when I reviewed our return before submitting - I had to point out "yes, it is a lot, but remember how much our income jumped as well... "

We will be able to convert our IRAs to Roth before RMDs hit, but maybe only a fraction of my 401K, so RMDs will be large... but even with that tax taken out it will not impact our planned lifestyle, even after one of us dies and the survivor has to pay the single tax rates. I still look at what is left after taxes are taken out is still more than 5X what I contributed over 35 years, and I cannot complain about that .

 

[athena53]

I just checked, My last year of full employment was 2104 and DH and I were in the 28% marginal tax bracket. Now, as a retired widow I was in the 24% bracket in 2021. So, yeah, I AM in a lower bracket but any dividends and LTGs taken out of IRAs will be taxed as ordinary income and will be part of the AGI that triggers IRMAA surcharges.

 

[old medic]

I'm baffled as to why anyone would think of an RMD as money "rolling in"? It is your money before the RMD, and it's your money after the RMD, it has just been subjected to a forced transfer from one account to another, and taxed in the process.

This is about the truest statement yet... The biggest thing to think about is how to manage to keep as much as possible.

VAFoodie, We are halfway there, 59/ 55, I'm retired with pension, DW has about 5 years to go before her pension, both can get SS. Our plan is to move as much as we can from 401 to Roth before starting SS. Sure wish we had started Roth years earlier.

 

[meleana]

We retired and moved out of state just as the pandemic hit- Feb. 2020.

Right now the way the market is I have no desire to overspend money on anything. And we have no pensions, not taking RMD’s until we are 72, and not taking SS until 70. Living strictly on cash and frugally. We are 66 and 68.

We also have not taken any vacations mainly due to the COVID restrictions and airline nightmare and gas prices. Thankfully where we live is vacation land.

 

[RunningBum]

I'm not getting either yet but I can't see any life changes. Roth conversions may eliminate RMDs but either way it's my money and I've always planned my retirement funding with having that money, after paying taxes. I've also factored in getting SS, by spending more now knowing that SS is coming later, probably at age 70.

However, I have factored a 35% SS benefit reduction in case the funding issue is never addressed. If I wind up getting full benefits, that will be a windfall. Not a big enough one to change my life, but it will be something.

I just can't see looking at this any other way. It's all part of retirement planning, right? Part of setting your retirement budget is knowing what money is coming in later, isn't it?

A more significant lifestyle change was enabled with really nice market returns early in my retirement. That opened up things like first class flying (I only fly 2-3 times a year) and slope-side ski lodging. That's a windfall I didn't see coming.

 

[TheWizard]

We've been doing RMD's for several years. Nothing about our lives changed. No "money starts rolling in." In fact, our annual budget increased due to paying the federal tax due on the RMD amount as it is transferred from our TIRA's to our brokerage account each year.

Why are you picturing a RMD as a windfall of new money that you have to figure out how to spend? It's not...

It can be, depending.
In my years prior to age 72, I did automatic monthly Roth conversions, where the amount converted was roughly equal to what my RMD would be at age 72.

Now that I'm 72 this year, I have 1/12 of my RMD hitting my checking account each month, along with SS and my pension/annuity payout. My RMD stream is the smallest of the three but I still deal with it as cash in my checking account that needs to be dealt with.

Overall, I have significant excess retirement income most months, so after paying off my credit card *balances*, I move the excess (beyond $10k) into my taxable account settlement fund to be invested in stock index funds.

None of my retirement income streams are "windfalls" that need to be "spent", but the total needs to be managed...

 

[deserat]

Yep. If I had it to do over again I'd put less in 401(k)s and more in after-tax. I don't think I realized till I was very close to retirement that EVERYTHING coming out of pre-tax is ordinary income, even LT gains and dividends. For me, the whole song and dance of "you'll be in a lower tax bracket when you retire" is a lie, due mostly to that but also due to taxes (Federal AND State ) on my SS and IRMAA surcharges.

Hear, hear to both of you all - however, I look at it as a good problem to have as I grew up seeing commercials of old ladies walking down the grocery aisle filling up their carts with cat food...the implication being (this was during the very high inflation days in 70s-80s) she could only afford cat food to eat for herself.

I am a decade or so younger than many on who post regularly on this board and have filed single now for 5 years; I do still work and plan on working until my first fairly decent pension starts in Mar 24. Nevertheless, I am looking at several of the looming dates (taxes rate reversion in 26, Medicare IRMAA look back for two years at age 65, etc) and am converting as much of my tax deferred portfolio to Roth as possible before several future dates. Unfortunately (or fortunately if you look at it another way), more than half of my retirement 'income' will be from pensions which are fully taxable; I will be in the mid to largish tax brackets until I die. However, if I can make my portfolio mainly tax-free (Roth) then what I do with the portfolio becomes moot with regard to taxes and hopefully will not be taxed or in some way indexed with regard to the pension income and/or healthcare insurance coverage. We'll see. It has been interesting to navigate this save for retirement game over the years with the changing rules. One can only hope they've played well....

 

[DrRoy]

We opened the taps after the first year or two. Remodeled the house, nicer travel, new car. I even bought a photography drone!
.

 

[cnocmmz]

Congrats on recognizing the (good) problem that can come from having Soc Sec, RMDs, Divs & CGs all coming in beginning in your 70’s. We start into that situation beginning in 2024 and leveling out in 2028 and thereafter. I’m doing large Roth conversions to substantially reduce taxes overall, more now, much less later. Maybe you’ve already read up on the tax torpedo and/or Roth conversions so you can take steps to reduce the overall tax burden. Your withdrawals/spending may prevent you from avoiding the tax torpedo, but at least you’ll know if you could/should have done something while you still have plenty of time, in your case.

If you aren’t aware https://www.kiplinger.com/article/t...orried-should-i-be-about-the-tax-torpedo.html