RMDs are they really something to worry about?

[2HOTinPHX]

Interesting videos just posted on YouTube? Seems RMDs aren't the scary tax hit they are made out to be? Is he missing something? He shows the math....seems traditional 401K may be good way to go and RMDS aren't that big of a deal. Your thoughts appreciated.

https://youtu.be/LBmsYM7RxqA?si=isyLB1fqSJ2RkCNj

 

[TheWizard]

RMDs are overblown as a problem area.
$1M in tax-deferred is only $40k/year in RMD income, more or less.

But at some point in your working years, if it looks like you have plenty in tax-deferred, then put more in Roth accounts and after tax accounts.

In my case, I have three retirement income streams that contribute to my AGI: pension/annuity, SS, and RMD.
RMD is the smallest.

Actually, dividends and interest is the smallest, but I'm skipping that...

 

[SevenUp]

Whether they are or not will depend on each person's situation.

The video makes the first of the Common misconceptions described there: comparing marginal tax rates vs. effective tax rates.

That will make traditional look better than it is. Still might be better than Roth - again, it depends... - but not that much better.

 

[Winemaker]

Well, as in all things retirement, everybody is different. While not everybody has $65k in pension income, $60k in SS, $20k in rental income, $10k in divvies and interest, and $100k in RMDs, some do. Once you hit $250k, then NIIT come in. Not to mention Tier 1 and 2 IRMAA penalties, and a higher Medicare premium. No, the effective tax rate looks small, but the add-ons increase that stealthily.

So, if one can reduce that number prior to taking SS and RMD's, it's a legal way to arrange one's affairs efficiently. Sometimes, the 6 figures I convert, in less than the 6 figures in gains, but some of us are trying to do something.

 

[Dash man]

We forecast out our RMDs before we started conversations and in our 80s it would have easily been six figures. It doesn’t hurt much early in retirement, but can really bite you later on, especially if filing taxes as an individual. So we did some large conversions to get it under control to the point where anticipated charitable donations can be done with QCDs.

 

[skyking1]

^ that is my takeaway on RMD's too. DW has not much in deferred, but we will do what we can to convert to the top of the bracket, to help minimize tax for a surviving spouse.
There is no mitigating taxes from the pension income, but we will do what we can on the rest.

 

[Al18]

I like the video. I like the last example where 80 year old Sally who is single, is paying $9175 in Federal taxes with an RMD of $49505 (1 million IRA) and AGI of $80000. The Federal taxes are still less than 1% of the amount in the IRA.

 

[TheWizard]

I think it's wise during your working years to think of money you put into tax-deferred accounts as DEFERRED INCOME, meaning that much of that money needs to come back out and be taxed as ordinary income.

If at some point your priorities start to shift and you're looking more at generational wealth, then shift over to using mostly Roth and taxable accounts...

 

[TheWizard]

Also, you can start taking money out of tax deferred accounts at age 59-1/2, either as ordinary income or as Roth conversions.
Waiting until age 72+ when distributions from those accounts are REQUIRED is a mistake if you have a large balance...

 

[ShokWaveRider]

We are not overly worried about RMDs. We do not have that much in IRAs. $600k each respectively. DW is just 65 so 7 years to go for her at the current law, and I am 70 so 2 years for me. $600k x 4% is a mere $24k. I guess if we had $4m in deferred accounts it may be different. We do not take any withdrawals currently and at the current interest rates will not need to for the forseeable future.

 

[Andre1969]

I just took a look. I have about $1.06M scattered between rollover IRAs and 401ks. I'm 53, and if I have my way I'm hoping to retire around my 55th birthday in April 2025. So, at this point I only have about a year and 8 months of additional contributions.

But, I believe I don't have to start taking RMDs until age 73, so that means they have another 18 years to compound. So, I guess it could amount to quite a handful by the time I have to start taking RMDs.

So, I've been thinking about doing some Roth conversions starting in 2025. Provided I do retire early enough in the year, that I don't have that big of an income for the year.

 

[SevenUp]

So, I've been thinking about doing some Roth conversions starting in 2025. Provided I do retire early enough in the year, that I don't have that big of an income for the year.

Probably a good plan, although if you go on an ACA health insurance plan the conversions may be too expensive to justify.

 

[Car-Guy]

+ I was getting "more than" 100% tax deferred matching while I was socking it away in my 401k all those years. If I contributed 5%, my company would contribute/match 6%. From my POV it was taxed deferred free money. I remember some of the younger folks working for me would ask when they became eligible to participate in the plan, if I thought the companies 401k was a good deal.

 

[Texas Proud]

We forecast out our RMDs before we started conversations and in our 80s it would have easily been six figures. It doesn’t hurt much early in retirement, but can really bite you later on, especially if filing taxes as an individual. So we did some large conversions to get it under control to the point where anticipated charitable donations can be done with QCDs.

+1 My oldest sister is in her 80s and her RMD is growing fast..


In your mid 80s the divisor is like 16 or 17...



So, $1 mill div by 16 is $62,500.... at 72 it is about $36,500...

 

[Landolink]

Plus have to consider state taxes. In Illinois you avoid taxes when you contribute and you don’t pay taxes when you withdraw. Save 4.95%.

 

[pb4uski]

RMDs are overblown as a problem area.
$1M in tax-deferred is only $40k/year in RMD income, more or less....

No! RMDs are not overblown at all.

Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.

Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.

 

[Midpack]

No! RMDs are not overblown at all.

Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.

Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.

+1. Add in Soc Sec and a lifetime ahead of dividends/STCG in taxable accounts and that additional $40K/yr pushes effective tax rates even higher! Like others have said, you have to actually do the math for your specific situation. RMDs may or may not be significant. The Roth conversions I’ve done are likely to save us about $400K in taxes over the next 29 years.

 

[SevenUp]

Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.

Is that all state tax? Federal and taxes are $0 using both the personal finance toolbox and IRS & State Tax Calculator. Appears the toolbox one applies a $20K pension subtraction so it gets $0 state tax also.

Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.

Agreed with the general idea that it's the (change in tax)/(change in income), whether one calls that "incremental", "marginal", "effective marginal", or whatever, that matters.

Similar issue with the $10,128: both tools linked above get ~$7,980 for federal tax, but it appears the toolbox assumes (perhaps optimistically, perhaps realistically) that the couple each has at least $20K each in subtractable pension and/or IRA income, so it gets only $158 for NY state tax instead of the $2150 the IRSCalc one gets.

 

[pb4uski]

I used https://www.irscalculators.com/tax-calculator

I get $158/0.23% for $20k pension and $50k SS (possibly I mistyped it).... $0 federal and $158 state.

Adding in $40k RMD is $10,128 in tax: $7,978 federal and $2,150 state.

Bottom line, the incremental tax on RMDs is a big deal.

 

[TheWizard]

+1 My oldest sister is in her 80s and her RMD is growing fast..


In your mid 80s the divisor is like 16 or 17...



So, $1 mill div by 16 is $62,500.... at 72 it is about $36,500...

The divisor is growing but the balance is often decreasing.
My RMD for 2023 is less than my RMD for 2022; how could that possibly be?

 

[TheWizard]

No! RMDs are not overblown at all.

Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.

Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.

Well if people want to be low income retirees, then there are ways of doing that, larger charitable contributions, for instance.

My goal was to be a higher income retiree and I may have achieved that, with Federal income tax exceeding $30,000 the last few years, filing single. State income tax is additional.

So a combined income tax of $10k for a couple is excessive?
Fine, so be it...

 

[TheWizard]

I'm thinking that another way of looking at RMDs is as a percentage of your AGI for the year. Mine was about 20% of my AGI last year.
I don't consider that way excessive and it's a bit smaller percentage than my total withdrawals from tax-deferred in the years before starting SS and RMDs...

 

[TheWizard]

No! RMDs are not overblown at all.

Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.

Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.

Your putting RMDs on top of other income and computing an incremental tax rate for that RMD is what we call disingenuous.
You could do the same for the pension income or the SS income.

And while that couple is REQUIRED to take RMDs, filing for SS and probably for a pension is totally optional if you don't want the additional retirement income. Which of course is completely silly...

 

[G-Man]

+1. Add in Soc Sec and a lifetime ahead of dividends/STCG in taxable accounts and that additional $40K/yr pushes effective tax rates even higher! Like others have said, you have to actually do the math for your specific situation. RMDs may or may not be significant. The Roth conversions I’ve done are likely to save us about $400K in taxes over the next 29 years.

Based on the retirement planning software I'm using, RMD will be a problem for me as well. However, I have 17 years before I turn 75. I definitely want to have a plan to address RMDs when I turn 60 in 3 years. The goal is to do roth conversions starting at age 60 as majority of my retirement investment in tax deferred accounts (401k).

 

[Birdie Num Nums]

I expect that when I have to take RMDs, a few years from now, all of each yearly RMD will go to various charities -- making them tax-free withdrawals.