RMD Folks how are you using the money

[audreyh1]

That is the RMD problem for many. They are forced to take out money they might not need, pay taxes they may otherwise not pay, including taxes on their Social Security they may have never had to pay before. And on top of that, because of draconian RMD IRS rules, many seniors may need to employ tax professionals for the first time. And as others here have posted, RMD might also cause their Medicare B premiums to increase.

It might be life as usual for you... but for others it could be quite a culture shock.

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That was the deal they signed up for when they were allowed to tax defer that money on the first place. No one “forced” them to put that money in tax deferred savings vehicles, and yes, they don’t get to keep it all in there for the rest of their lives and pass it along tax free to heirs. That was the deal up front - loud and clear. You got to grow the money tax free for decades, come 70 its time to start paying the piper.

It would be much simpler tax wise to not save and invest, and just rely on social security.

 

[Helena]

That was the deal they signed up for when they were allowed to tax defer that money on the first place. No one “forced” them to put that money in tax deferred savings vehicles, and yes, they don’t get to keep it all in there for the rest of their lives and pass it along tax free to heirs. That was the deal up front - loud and clear. You got to grow the money tax free for decades, come 70 its time to start paying the piper.

When I was 30-something... I was told about paying deferred taxes on traditional IRA withdrawals. But I don't remember anyone warning me that I when I turned 70, I would be FORCED by draconian IRS laws to withdraw whatever huge amount the government tells me to withdraw which also forces me to pay taxes on Social Security and increases my Medicare B premium.

Hopefully my posting it here will warn others.

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[ERD50]

That is the RMD problem for many. They are forced to take out money they might not need, pay taxes they may otherwise not pay, including taxes on their Social Security they may have never had to pay before. And on top of that, because of draconian RMD IRS rules, many seniors may need to employ tax professionals for the first time. And as others here have posted, RMD might also cause their Medicare B premiums to increase.

It might be life as usual for you... but for others it could be quite a culture shock.

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You nailed it.
We don't need the distribution, as we have all of our needs met and then some by divs and bond ladder interest. Further the RMD does move us into a higher tax bracket. If I could convert my beneficiary IRA to a Roth and defer till later years I'd do it in an instant. But alas, it can't be done without cashing out the entire 7 figure IRA and taking a huge tax hit at one time. Not a bad problem to have however...

I fully understand the effects of an RMD. But they are unavoidable (or take a what, 50% penalty?), so what you do with them seems to be a rather silly question. What do you do with any other money you have?

You have the option of investing it in exactly what you took it from. It doesn't force an AA change or anything else. It only forces the tax implications, but those are unavoidable.

-ERD50

 

[Helena]

I fully understand the effects of an RMD. But they are unavoidable (or take a what, 50% penalty?), so what you do with them seems to be a rather silly question. What do you do with any other money you have?

You have the option of investing it in exactly what you took it from. It doesn't force an AA change or anything else. It only forces the tax implications, but those are unavoidable.

-ERD50

The topic question is was not silly to me.

As I posted in my first post here, much of my RMD money
will go to pay the extra taxes RMD forces me to pay on SS.

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[braumeister]

I don't remember anyone warning me that I when I turned 70, I would be FORCED by draconian IRS laws to withdraw whatever huge amount the government tells me to withdraw.

I don't remember a lot of things either.

But the RMD provision has always been there, whether we thought about it long ago or not.

 

[audreyh1]

When I was 30-something... I was told about paying deferred taxes on traditional IRA withdrawals. But I don't remember anyone warning me that I when I turned 70, I would be FORCED by draconian IRS laws to withdraw whatever huge amount the government tells me to withdraw which also forces me to pay taxes on Social Security and increases my Medicare B premium.

Hopefully my posting it here will warn others.

.

When I was late 20s, 30 something I understood that I would have to redeem funds once I reached a certain age, would pay taxes on the withdrawal, and that penalities were very high if I didn’t.

In practice, I don’t believe many folks pay 50% penalties from what I’ve read. The IRS does show some leniency if you try to correct things and file the forms ASAP.

 

[W2R]

I don't remember a lot of things either.

But the RMD provision has always been there, whether we thought about it long ago or not.

I remember it being fully and openly disclosed to me at the time, and the pros and cons were completely available to me from many other sources as well.

But I also remember feeling like it would be at least six million years before I got old and would be able to retire. I figured that by that time, if I magically survived to old age, I'd have enough tax sheltered savings to support myself. I didn't really care about RMDs (even though I knew about them), because it seemed impossible that I would ever be that old anyway.

And now, here I am, 70 and retired. How could this be? Who woulda thunk?

 

[REWahoo]

One of the hallmarks of advancing age is the refrain, "If I had only realized what it meant at the time..."

 

[Sunset]

I fully understand the effects of an RMD. But they are unavoidable (or take a what, 50% penalty?), so what you do with them seems to be a rather silly question. What do you do with any other money you have?

You have the option of investing it in exactly what you took it from. It doesn't force an AA change or anything else. It only forces the tax implications, but those are unavoidable.

-ERD50

Actually it is a 50% penalty, and THEN you still have to withdraw the RMD money, so it ALSO increases your taxes on SS , medicare , and possibly the tax bracket rate.

They are unavoidable.

 

[Lsbcal]

There is a good Bogleheads Wiki article on taking RMD's under the 2018 tax rates with Social Security in the mix. See:
https://www.bogleheads.org/wiki/Taxation_of_Social_Security_benefits#cite_note-8

For a married couple the table below was very helpful for me. Since our tax situations are so different it's hard to make generalizations.

There is a similar table for single filers in that Wiki article.


We too will be spending all of the RMD's.

 

[Helena]

And now, here I am, 70 and retired. How could this be? Who woulda thunk?

It might seem funny to you. But others might not find it quite so amusing. Some congressmen have submitted bills to try to fix at least some of the RMD/SS problems I have addressed here on this topic.

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[RobbieB]

I was always aware of RMD at age 70 just like no penalty at 59 and a half. Easy.

As to having to pay more tax, well you have more dough eh?

 

[Sunset]

You could contribute to a 529 of someone you know and take a tax deduction.

Nearly did this, but the parents are really well off, so it was just going to be useless for the kids. Plus here in IL if you do it and take the tax deduction , when you move out of State, you have to repay the deduction.
Don't know if taking and repaying deduction are connected, might just have to repay even if one didn't take it, like landlord rental depreciation rules (irs).

Since we were/are planning to move, it also seemed like a bother.

You can gift to family.

None who are responsible seem to be in need, and certainly don't want to reward bad behaved ones.

My question is, what would you want to do with it. Spend, or re-invest?

We do both, reinvest via conversions to ROTH for the majority of it, and some spending of it or stash in CD's to possibly spend later.

 

[ERD50]

The topic question is was not silly to me.

As I posted in my first post here, much of my RMD money
will go to pay the extra taxes RMD forces me to pay on SS.

.

But those taxes are still just an unavoidable effect of the RMD. Here's why I still say the question seems silly, (consider all else equal):

Person A: I took my RMD and bought a new car with it! (it goes unsaid that he paid the taxes from another account).

Person B: I took my RMD and used it to pay the taxes it created. (it goes unsaid that he bought a new car with funds from another account).

Both statements are true (money is fungible), both statements are equivalent, and neither statement informs the OP of anything of value. To me, that makes it either outright silly, or just silly entertainment.

-ERD50

 

[Helena]

You can gift to family.

None who are responsible seem to be in need, and certainly don't want to reward bad behaved ones.

Profound statement. This seems to be a universal problem.

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[RobbieB]

The question is how do you use the RMD dough.

You can spend it, you can save it, you can re-invest it, you and give it away.

Nothing silly about it.

 

[ERD50]

It might seem funny to you. But others might not find it quite so amusing. Some congressmen have submitted bills to try to fix at least some of the RMD/SS problems I have addressed here on this topic.

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What 'problem' are they going to fix, and how would they do this?

Seems to me we need a time machine, so that I pay the taxes I saved back when I was working and in a high tax bracket, and then I have to go back and adjust my standard of living down. No thanks. I made a choice, and I will live with the consequences of that choice.

Yes, I know the theory was that we would be in a lower tax bracket in retirement, and that didn't work out for many people. But there are few guarantees in life, and if the govt is going to 'fix' every disappointment for every one of us, well, I fear that will lead to even bigger problems.

We paid our money (in this case, we didn't pay our [tax] money!), and we took our chances. Not every plan works out. I'm adapting with some ROTH conversions. Life goes on (and it goes on pretty well).

-ERD50

 

[MichaelB]

This argument is going nowhere but is hijacking the thread, Why not just drop it and walk away?

 

[ERD50]

The question is how do you use the RMD dough.

You can spend it, you can save it, you can re-invest it, you and give it away.

Nothing silly about it.

Perhaps you cross posted with my post #64. Doesn't that example show it to be a silly question?

-ERD50

 

[ERD50]

This argument is going nowhere but is hijacking the thread, Why not just drop it and walk away?

oops, sorry. OK -ERD50

 

[Andre1969]

I was always aware of the whole "1970.5" RMD thing, as well, but mainly because I can remember my grandmother having to start drawing from her IRA back in 1994. I remember she was griping about it, because she didn't need the money, and being forced to withdraw it, etc.

Anyway, because of that, I was always aware of it ever since I first opened an IRA, and then a 401k. However, what I didn't realize, until maybe a few years ago, was that the RMD amount increased every year. I guess I could have studied it and read up on it, but at the time, felt like the age of 70.5 was a long ways off; I'll worry more about it as that gets closer.

 

[Dtail]

That was the deal they signed up for when they were allowed to tax defer that money on the first place. No one “forced” them to put that money in tax deferred savings vehicles, and yes, they don’t get to keep it all in there for the rest of their lives and pass it along tax free to heirs. That was the deal up front - loud and clear. You got to grow the money tax free for decades, come 70 its time to start paying the piper.

It would be much simpler tax wise to not save and invest, and just rely on social security.

I agree, but wish I knew more about the play between Roth, TIRA and Taxable accounts back then, so could have made better investment decisions as to allocation between the 3 vehicles.

 

[kgtest]

I agree, but wish I knew more about the play between Roth, TIRA and Taxable accounts back then, so could have made better investment decisions as to allocation between the 3 vehicles.

DF wishes the exact same thing. Currrently five years out from RMD and aggressively backdoor converting. He never contributed outside tax-deferred until his last two years of working.


Currently with his aggressive five years of conversions, he is looking at 80% of total invested being in line for the tax torpedo. Whereas I have learned from his mistake, and provided in ~35yrs the RMD factors/solution is unchanged, I am alive I will be looking at ~50% of total invested taxable come RMD.


Of course if I inherit anything along the way, that either forces me to convert more to ROTH, or pay more tax...but hey more dough to blow.


Both FIL and DW are well off. Both have millions in real estate and millions invested, one living off dividends of spouse+SSA, the other living off pensions, SSA, Rent and some hard money loan interest.



RMD will quickly push them into higher brackets than they comfortably enjoyed those 5-6years before tax torpedo came.


I anticipate some gifts, or else at least some more frequent invites to dinner, tag along trips etc. along with some minor grumpiness come tax season in five years time.


At some point here my entire family will be well above 22% tax bracket...only a matter of time. #winning #healthiswealth

 

[pacergal]

I agree, but wish I knew more about the play between Roth, TIRA and Taxable accounts back then, so could have made better investment decisions as to allocation between the 3 vehicles.

+1
35-40 years ago, what I heard was "put $ in IRA, lower your taxable income" So thats what we did. Kids, job, and life moved forward and about 5 years before retirement, I finally started putting the pieces together. I realize when SS and RMDs hit, we most likely (as long as we are both healthy) will not need the money for day to day expenses and will re invest or gift. We will pay the taxes, and probably get hit with IRMA too.
But, its a good problem to have, I feel blessed to have the financial security that I do at this time.

 

[Dtail]

+1
35-40 years ago, what I heard was "put $ in IRA, lower your taxable income" So thats what we did. Kids, job, and life moved forward and about 5 years before retirement, I finally started putting the pieces together. I realize when SS and RMDs hit, we most likely (as long as we are both healthy) will not need the money for day to day expenses and will re invest or gift. We will pay the taxes, and probably get hit with IRMA too.
But, its a good problem to have, I feel blessed to have the financial security that I do at this time.

Yes agree and it is a first world type of problem.
OTOH, my same ignorance helped me to not get out of whack with the 2008 debacle and thus didn't sell any stocks.