RMDs - Projecting/Calculating the Right Balance?

[DawgMan]

I have kicked this around in a post earlier this year coming at it from a Roth conversion/taxable account usage strategy, but I'm still curious as to what point you just hit the brakes on Roth conversions and just let your needed withdrawals from your tax differed accounts play out. Sure, it depends on some crystal ball forecasting (i.e. future tax rates, portfolio growth) and one's specific situation. And yes, when 1 spouse takes a dirt nap, it hits the other spouse, but how many of you are really that worked up about this? I hear a good bit of talk about Roth conversions in the 12% range, but as you climb the scale closer to 24%, are the gymnastics really worth it?

My case, my portfolio is split roughly 50/50 in taxable and tax differed accounts. My planned withdrawal will have me close to the top end of the 24% marginal tax rate, assuming it was 100% taxable. After taking my naturally produced interest/dividends/capital gains from taxable accounts, my plan was to take the balance of my planned spend from my tax deferred accounts (never going over 24%). My thought is this will be a de facto Roth conversion. I suppose I could go a step further and Roth convert any additional $$ over my desired annual spend up to the maxed out 24%, but should I? Yes, I believe taxes will be higher in the future so I suppose I answered my own question.

But, if I estimate my future RMDs at 72 to be no more than my desired withdrawal, should I care about doing even more conversions today? I suppose if I believe taxes will be higher (I do) and if I care about the surviving spouse paying higher taxes as a single filer (maybe, but 1st world problem as there will be only 1 spender at that point). Maximizing legacy (not as important, but there will most likely be a bucket full)? I suppose it makes sense. There I go again, basically answering my own questions.

Hey, thanks for listening!

 

[SecondCor521]

I don't know why, but I always like threads on Roth conversions. Probably because it feels like one of the last big knobs I can turn to affect my financial outcome at this point.

I'm no expert, but in general, I'm currently planning on a "convert up to top of X% bracket" plus "keep things even" approach. So my RMD optimization spreadsheet has me Roth converting up to the top of one bracket until age 59, and then the top of the next bracket up from there on out.

I'm also single with no plans to marry again, and I don't mind leaving leftovers because I have my three kids, so there's those differences.

As for your first paragraph, I think the upper limit for me would be if the plan would result in depleting the traditional IRA before end-of-plan, or if it had me dropping into a lower bracket later on (like 12% then 22% then back to 12%).

As for your second paragraph, if you're over 59.5, I don't think there is a difference, but if it makes sense to Roth convert more due to legacy reasons, you might do that. My Dad might be in that situation this year - I'm considering recommending he turn off his RMDs and make Roth conversions equal to his RMDs for the rest of the year. As long as his cash flow needs are met, then it's better to have the money in the Roth, but that depends on tax rates of beneficiaries vs. tax rates of the owner.

As for your third paragraph, I think it does make sense up to a certain point (see paragraph 1 again). Conversions today reduce RMDs later and also increase legacy later. Even if your RMDs end up below your future desired withdrawals, that's OK. Just withdraw more from whichever account makes sense at the time.

 

[Out-to-Lunch]

But, if I estimate my future RMDs at 72 to be no more than my desired withdrawal, should I care about doing even more conversions today? I suppose if I believe taxes will be higher (I do) and if I care about the surviving spouse paying higher taxes as a single filer (maybe, but 1st world problem as there will be only 1 spender at that point). Maximizing legacy (not as important, but there will most likely be a bucket full)? I suppose it makes sense. There I go again, basically answering my own questions.

Sounds like you have a decent handle on the issues.

I think that:
To zeroth order, you should seek to levelize income (as you acknowledge) and as a tax-rate arbitrage (as you acknowledge).
To first order, you should worry about tax rates of surviving spouse.
To second order, (if you are young enough) you should try to use Roth conversions to minimize IRMAA.
To third order, to optimize for heirs.

 

[Animorph]

I stop big Roth conversions after this year, though I'll still make smaller conversions since I still have no income other than fund distributions.

I'm currently converting at the same tax rate I expect to have for RMD's. I'm 65 but I've converted all of my tIRA into Roth. DW is 60, so RMD's start in 12 years for us. That's also when our Roth withdrawals probably start. For us, this is about the time when the benefit of moving taxable money into the Roth begins to be outweighed by the benefit of the 0% long-term capital gains tax bracket. So we'll fill in the 10% tax bracket with Roth conversion, I think, and make sure we fill the 0% capital gains bucket. We'll probably have additional 15% LTCG's as we sell taxable stocks for expenses, but that rate should be constant throughout retirement.

Anyway, Roth conversions versus 0% capital gains may be a decision point when you have 10-12 years or less before Roth withdrawals. Before that of course is Roth conversions versus various tax breaks and ACA subsidies. Closer to Roth withdrawals the goal is mainly getting whatever you can out of the tIRA at a lower tax rate than the coming RMD's will have. That may be for tIRA withdrawals you will use for expenses or Roth conversions if you still don't need that money. Not much to decide once RMD's staart.

As usual with everything taxes everyone is going to have a slightly different situation. Nothing beats projecting the whole thing out to see what works best for you. I have also found that we have a pretty broad region around our "perfectly optimized" plan that is still very close to optimal in terms of how much we can spend each year. So your best guess may be nearly as good as my obsessively optimized plan.

 

[Green Papaya]

Most of our NW are in tax deferred accounts. If we do not do Roth conversion now, our federal taxes will be quite high at RMD. Our plan is to convert up to 12% until 65, then ramp up conversion to 24% tax rate until 72. After that, RMD will provide sufficient funding for living costs with a little bit left over each year.

 

[Lsbcal]

Think about what kind of investor you are. I find that the Roth's come in quite handy as all my gains are mine to keep. No taxable events and I can trade (just a bit) without considering tax consequences.

Yes, you can trade in an IRA but Uncle Sam will take a lot of those compounded gains eventually. And I expect tax rates to rise, perhaps dramatically in coming years.

 

[friar1610]

Never done any Roth conversions but seriously thinking about it this year since there are no RMDs to do first. Probably won't benefit me a lot but should help my kids who will likely end up inheriting our modest retirement accounts.

 

[Sunset]

Never done any Roth conversions but seriously thinking about it this year since there are no RMDs to do first. Probably won't benefit me a lot but should help my kids who will likely end up inheriting our modest retirement accounts.

It's always handy to have a good sized Roth, in case of sudden need for a large amount of cash that won't trigger any taxation.

 

[Out-to-Lunch]

Most of our NW are in tax deferred accounts. If we do not do Roth conversion now, our federal taxes will be quite high at RMD. Our plan is to convert up to 12% until 65, then ramp up conversion to 24% tax rate until 72. After that, RMD will provide sufficient funding for living costs with a little bit left over each year.

Just curious about your plan. May I ask how old you are? The reason I ask is that I plan to do more conversions early, so as to not trigger going to higher IRMAA tiers. So I plan to be mostly done converting by age 63. It seems like your plan reverses this order, and I am curious to know if/why your way is better.

 

[Green Papaya]

Just curious about your plan. May I ask how old you are? The reason I ask is that I plan to do more conversions early, so as to not trigger going to higher IRMAA tiers. So I plan to be mostly done converting by age 63. It seems like your plan reverses this order, and I am curious to know if/why your way is better.

I am 61. The reason I do not convert aggressively now is due to MAGI limits on ACA tax credits.

 

[Gumby]

Be careful with your dad's situation. I don't believe you can substitute Roth conversions for RMDs.

I don't know why, but I always like threads on Roth conversions. Probably because it feels like one of the last big knobs I can turn to affect my financial outcome at this point.

I'm no expert, but in general, I'm currently planning on a "convert up to top of X% bracket" plus "keep things even" approach. So my RMD optimization spreadsheet has me Roth converting up to the top of one bracket until age 59, and then the top of the next bracket up from there on out.

I'm also single with no plans to marry again, and I don't mind leaving leftovers because I have my three kids, so there's those differences.

As for your first paragraph, I think the upper limit for me would be if the plan would result in depleting the traditional IRA before end-of-plan, or if it had me dropping into a lower bracket later on (like 12% then 22% then back to 12%).

As for your second paragraph, if you're over 59.5, I don't think there is a difference, but if it makes sense to Roth convert more due to legacy reasons, you might do that. My Dad might be in that situation this year - I'm considering recommending he turn off his RMDs and make Roth conversions equal to his RMDs for the rest of the year. As long as his cash flow needs are met, then it's better to have the money in the Roth, but that depends on tax rates of beneficiaries vs. tax rates of the owner.

As for your third paragraph, I think it does make sense up to a certain point (see paragraph 1 again). Conversions today reduce RMDs later and also increase legacy later. Even if your RMDs end up below your future desired withdrawals, that's OK. Just withdraw more from whichever account makes sense at the time.

 

[braumeister]

Be careful with your dad's situation. I don't believe you can substitute Roth conversions for RMDs.

Yes, if you're of RMD age, any IRA withdrawals are automatically considered to be RMDs until they reach the RMD amount. After that point you can convert to a Roth. The only way to avoid that is with QCDs.

 

[REWahoo]

I think 2Cor was making the Roth in lieu of RMD suggestion specifically for "this year" as he stated, since RMDs are waived for 2020. I'm planning to take advantage and convert some of the RMD money I don't have to withdraw this year to a Roth.

 

[H2ODude]

I have tried (years ago) to figure out what makes the most sense for conversions. It's just like so many of these questions, you have to make assumptions about longevity, tax rates, rates of return, on and on and the "true" answer is kind of unkowable in my estimation. However, starting at retirement at 60 most of our assets were in tIRA's and I knew that when we took SS at 70 (and then MRW were at 70) the tax torpedo was real. So it was a matter of how much to move over each year, until 70, now 72.

The tax rate ceiling for us wasn't that much of a difference compared to other assumptions. I ended up deciding that heck, IRS isn't full of idiots and the MRW was based on actuarial longevity, so I just started moving what the MRW would have been each year IF I was 70/72. It actually keeps us just under the next bracket, so all good there. So for last 6-8 years we've been converting as though we were at the mandatory age of MRW. This way tax bills look about what they will then. Not material to this discussion but with all the yakking about SS I just decided to pull the switch on SS and take mine 6 months before 70, switching from DW's spousal benefit and moving her to spousal on mine.

To me the most tangible, or maybe knowable, benefit of paying tax now and doing conversions is the probability that one of us will outlive the other (despite the fact that we both seem to be blessed with equally good health that we both work on). So depending on how long the longevity gap is between us, the additional tax paid as a single filer could be very substantial. And, now that Covid has put the kibosh on our most significant discretionary expense, travel, we're not even spending any of the portfolio. It's nuts; we pay the bills with SS and pension and send MORE money to Fidelity each month. So yeah, the beneficiaries of conversions are likely to be the kids/grandkids. Yeah, first world problems.

 

[SecondCor521]

Be careful with your dad's situation. I don't believe you can substitute Roth conversions for RMDs.

RMDs are not required in 2020 as part of the CARES Act. My suggested course of action would only be for this year. I appreciate the comment though, as it is typically correct.

 

[Gumby]

RMDs are not required in 2020 as part of the CARES Act. My suggested course of action would only be for this year. I appreciate the comment though, as it is typically correct.

I had forgotten about the part of the CARES Act eliminating RMDs for 2020, since it's another 11 years before I have to worry about those. So,

 

[Koolau]

My conversion days are over. I pretty much accomplished most of my conversion goals. One goal, possibly not immediately obvious to everyone was to get "rid" of ALL my tIRAs. SO I only have my 401(K) to deal with. Now there are no worries about multiple tIRAs (hers and mine with multiples for each). This means fewer opportunities for mistakes when it comes to taking RMDs - those penalties can be brutal.

Do I think much about the "big" taxes in my future as my RMD factor increases year by year? No, since there's not too much I can do about it and it IS a good problem to have. Sort of a "I have too much money" problem" heh, heh. YMMV