Should RMDs really scare you?
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audreyh1
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I should add that DH manages the annual charitable grants out of our DAF (donor advised fund). I'm responsible for the contributions to the DAF, which I tend to do when tax benefits are high, such as contributions of appreciated stock (which can even be handy during rebalancing). I pre-loaded it pretty heavily 2014-2017.
DH was complaining that our DAF grants needed to increase. I explained that once he turns 70.5 (in about 5 years) he can start contributing from his IRAs via QCDs. So he can draw down the DAF much more aggressively if he'd like. Some lightbulbs started going off in his head.
The DAF might still be useful for smaller anonymous contributions.
DH was complaining that our DAF grants needed to increase. I explained that once he turns 70.5 (in about 5 years) he can start contributing from his IRAs via QCDs. So he can draw down the DAF much more aggressively if he'd like. Some lightbulbs started going off in his head.
The DAF might still be useful for smaller anonymous contributions.
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harllee
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Why is that?
audreyh1
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Maybe he thinks they should go on the Blow that Dough thread!
RunningBum
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I think it's pretty awesome.
Lawrencewendall
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Had to laugh at this. My coffee is done before I even get my shoes and socks on in the morning. That's starting the pot before I sit down to put them on. $8 a cup? NUTS!
So here is my pickle (and yes, everyone's situation is different)... my investments (and any SS I get at 70) will be the only resources to feed me and DW in retirement. My assets are split roughly 50/50 taxable and tax deferred. We are planning on a pretty fat withdrawal rate, which includes certain "constants" for taxes. After getting into the weeds with some calculators that take into account taxes, I have determined I can live off my taxable accounts just fine until RMDs hit (currently 56). Between return of capital/capital gains/interest, my taxes would be minimal until 72. If I take this approach, I get smacked in the face hitting the highest tax brackets for most of the RMD years, yet still, most of the calculators show me doubling my NW in the end. So, should I really care about RMDs? Maybe we have another President when I turn 72 who implements a similar tax policy like we have today? While legacy is not a big part of my plan, there will almost assuredly be a pot there for my kids in the end. I have looked at Roth conversions and/or strategic 401k withdrawals up to say the 24% bracket, but that sure looks less appealing short term compared to almost no taxes by pulling from my taxable accounts early on. At this point, I have somewhat settled on pulling a set amount annually from my 401K account up to a certain tax bracket threshold with the balance coming from taxable, but still wondering if I should really care about the looming RMD impact?
How much does the fear of RMDs affect your Roth conversions/401K withdrawal strategy?
Have any of you hit RMDs and having remorse for not taking a more aggressive approach before then?
Mt two cents: A partial conversion from a traditional IRA to a Roth should be an option that you should considered. This will allow you to hedge your bet. You do not have to have a 100% conversion.
https://www.merrilledge.com/article/thinking-of-converting-to-roth-ira
I do not have this problem I am totally diversified. That is. I do not have all my retirement eggs in one basket. My wife and I have a Roth IRA, a traditional IRA, two government pensions, social security, multiple income producing properties and a business partnership with a close friend. Taxes are a minor nuisance problem to me and I let my CPA advise me from time to time.
She recently suggested cashing out on some of my taxible investments since taxes for me is likely going up. She suggested selling some of my investments at the current relatively lower tax rates and then buy back the same investments. I pay taxes in the short term but I reset my capital gain basis to a higher number. This may save me taxes in the long term and this suggestion will fall apart if taxes are going down in the future.
Brat
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DH and I are neck-deep in RMD world. This year RMDs are suspended. I am converting as much as I can while staying in the 22% bracket because I believe that income tax rates will increase in the foreseeable future. I pay income tax out of our checking account, not out of IRA money to maximize the benefit.
Once RMDs kick back in I can convert only in excess of our RMDs. Ouch!
Once RMDs kick back in I can convert only in excess of our RMDs. Ouch!
Given the snap back scheduled for 2026, have you considered converting into 24% bracket? It's only 2% more (duhh, sorry!).
Of course, it all depends upon size of the TIRAs. We have maxed 24 for 3 years, and I'm still agonizing over 32% bracket for this year.... N.B., we are a decade from RMDs.
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mickeyd
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This is a great question/topic to get into. Thanks for posting it.
I started doing Roth conversions 15+ years ago. (I am 76 YO). At that time I limited my Roth conversions to how much excess cash I had on hand to pay taxes. I wish that I had as much ready cash as I have today, but did not. Today I have a bunch of cash earning somewhere south of 1% and I am happy to spend it on Roth conversions, especially this year that RMDs are suspended. I did Roth conversions in an amount that I would have done RMD. I will pay taxes in my upcoming EFTPS estimated tax filing on 1/15/2021.
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I've been trying to narrow in on my maximum Roth conversion while staying in the 12% bracket, for a while now and it's getting pretty close to crunch time.
I don't currently have or use the ACA, SS, Pensions, and no worries about IIRMA.
My wife has funded an HSA, with $8,100, still two kids on the policy, I'm on Medicare.
I have entered all our data in to DinkyTown 1040 Calculator, Ordinary and Qualified Dividends, Short term and long term gains, HSA. I then rocked the IRA withdrawals amount back and forth until I drop into the 12% bracket. The withdrawals I can make (and Roth convert) is $75,800 and still stay in the 12% bracket.
I have withdrawn enough from MMs and stock funds for 2021 Spending, 2020 Taxes, HSA, and kids tuition payment. So, the $75,800 is a great amount to be able to withdraw while in the 12% bracket.
Is there anything else or another view I need to take before making the Roth Conversion?
I don't currently have or use the ACA, SS, Pensions, and no worries about IIRMA.
My wife has funded an HSA, with $8,100, still two kids on the policy, I'm on Medicare.
I have entered all our data in to DinkyTown 1040 Calculator, Ordinary and Qualified Dividends, Short term and long term gains, HSA. I then rocked the IRA withdrawals amount back and forth until I drop into the 12% bracket. The withdrawals I can make (and Roth convert) is $75,800 and still stay in the 12% bracket.
I have withdrawn enough from MMs and stock funds for 2021 Spending, 2020 Taxes, HSA, and kids tuition payment. So, the $75,800 is a great amount to be able to withdraw while in the 12% bracket.
Is there anything else or another view I need to take before making the Roth Conversion?
youbet
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Yes. You're likely overdoing the analysis. Would it really be significant if your Roth conversion brought you slightly into the next tax bracket? Hitting one of the cliffs, like one of the IRMAA cliffs, can be a big mistake because a small marginal change in income can result is a large tax expense. But having a few bux go into the next tax bracket wouldn't be such a big deal, IMHO.
Ya, I actually think it is better to let some go in at a higher bracket, that is at least break even, and at best still beats the tax rate later, especially if rates increase, plus the single filer advantage.
Time2, this is exactly the process I went through last year and this year. I have a small pension so the withdrawals I can make and spend or Roth convert is about $72,000 in the 12% bracket. Unfortunately I "have" to spend most of that so I only ended up converting around 22K to Roth this year.
Only 5% of my retirement nest egg is in Roth, the rest is all tIRA/401k. Unless I start going into the 22% bracket for conversions I won't make much of a dent... I just can't decide to do it...
But it is nice to have a little bit of money that the tax man won't get when I'm 72.
I guess I'm lucky that I still have a pretty good chuck of cash in taxable money with a good ratio of LTCGs. Because of this, I can get a lot of tax free funds out and have plenty of room for Roth conversions.
Once I get a lot in Roths, do I concern myself with keeping some money in taxable funds. Seems they are about equal when it comes to taxes. Zero up to $80k and zero!
HI Bill
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Because future tax rates are unknown, and you'll then be in a higher tax bracket, you should absolutely be concerned, not about RMDs, but the tax bracket you'll be in when RMDs hit.
Several options: 1) Roth conversions as others have mentioned. 2) If you retired in the year you turned 55 or 56, you can take penalty-free distributions from your 401(k); 3) if not, I'd suggest a hybrid distribution plan starting at 59.5, where you balance fully taxed withdrawals from tax-deferred accounts (which will reduce your future RMDs), with partially taxed distributions from taxable accounts.
This is my strategy for the year I FIRE and turn 55, and I project a spending level of about $150K, with almost no federal taxes. I'll be taking inherited IRA distributions equal to the MFJ Standard Deduction, then hitting up taxable accounts based on the cost basis (most of these are about 50% LTCGs), and adding on dividends as they come in.
I’m trying to preemptively contribute more to my Roth 401k and I already max my Roth IRA every year. My current job is the only one that offered the Roth 401k option so I haven’t had access to this option for very long.
My current 401k allocation is 8% into the tax deferred traditional 401k side and 14% goes into the Roth 401k option. The tax deferred amount is more than enough to maximize the company match. Admittedly I chose this percentage breakdown quite randomly other than making sure the Roth side was a higher percentage.
I guess my thought process was to make these Roth 401k contributions now so I could just roll them all over into my Roth IRA when I retire. I may still do Roth conversions if it is beneficial to me for tax purposes.
My 401k balance is about 6 times the amount in my Roth IRA so it’s significantly larger. I’m hoping this shift towards contributing to the Roth 401k side of my 401k plan will shift things to be a little more balanced going forward.
Maybe I’m overlooking something but it seemed like a good idea. I do wonder if it will make any difference or if I would end up in about the same place as far as taxes by just putting everything in the regular 401k.
I guess if you have a large RMD that means you’ve won the game and done well. I also have to remember that my 401k money has grown year after year without having to pay taxes on the gains every year.
I’m not going to worry too much about RMD. The rules could change a lot by the time I’m old enough to have an RMD anyway.
My current 401k allocation is 8% into the tax deferred traditional 401k side and 14% goes into the Roth 401k option. The tax deferred amount is more than enough to maximize the company match. Admittedly I chose this percentage breakdown quite randomly other than making sure the Roth side was a higher percentage.
I guess my thought process was to make these Roth 401k contributions now so I could just roll them all over into my Roth IRA when I retire. I may still do Roth conversions if it is beneficial to me for tax purposes.
My 401k balance is about 6 times the amount in my Roth IRA so it’s significantly larger. I’m hoping this shift towards contributing to the Roth 401k side of my 401k plan will shift things to be a little more balanced going forward.
Maybe I’m overlooking something but it seemed like a good idea. I do wonder if it will make any difference or if I would end up in about the same place as far as taxes by just putting everything in the regular 401k.
I guess if you have a large RMD that means you’ve won the game and done well. I also have to remember that my 401k money has grown year after year without having to pay taxes on the gains every year.
I’m not going to worry too much about RMD. The rules could change a lot by the time I’m old enough to have an RMD anyway.
pb4uski
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A couple minor nits. First, if you make charitable contributions for 2020 there is a $300 contribution deduction per return available. Second, if you have any qualified dividends or LTCG you should use the $80,000 top of the 0% qualified divndends/LTCG tax bracket rather than the $80,250 top of the 12% tax bracket... because if you use the latter then your last $250 of conversion will be taxed at 27% (12% + 15%) rather than at 12%.
So, assuming that you use the standard deduction and have at least $300 of chartiable contributions and are both under 65 that would be $80,000 top of 0% qualified dividends/LTCG tax bracket + $24,800 standard deduction + $1,300 over 65 + $300 charitable contributions deduction + $8,100 HSA deduction= $114,500 of income. Then subtract the total of your income from other sources to derive your Roth contribution.
If you itemize then you'll need to adjust as needed.
They're collectively quite humorous to me.
That's not hard for me either as I rarely wear sox.
Which is why if you do QCD's, put them off till next year when you'll have RMD's that the QCD's can offset.
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Have any of you hit RMDs and having remorse for not taking a more aggressive approach before then?"
Well, tax rates were higher before 2017 such that RC's were not as advantageous, and by 2018 we were into SS which reduce our room a fair amount, and by 2019 we were also into RMD's, so not much of a window. I suppose we could have taken SS at an earlier age, but there was a security concern with that.
Have any of you hit RMDs and having remorse for not taking a more aggressive approach before then?"
Well, tax rates were higher before 2017 such that RC's were not as advantageous, and by 2018 we were into SS which reduce our room a fair amount, and by 2019 we were also into RMD's, so not much of a window. I suppose we could have taken SS at an earlier age, but there was a security concern with that.
harllee
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I still don't understand. DH and I do charitable giving to causes that are very important to us. Next year DH will be 70.5 so we will do those charitable gifts out of his IRA. We will probably increase our charitable giving since we will be able to use his IRA. This will reduce his RMD to a level that will not impact our taxable income very much. We have plenty of money to live on outside the IRA. Is there some reason we should not do it this way?
Souschef
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What you said is correct as far as it goes. If you take out $500K, and you are in the 22% bracket, you will pay $110K in taxes on it.
If you do a QCD for $100K you pay taxes in $400K, at 22% bracket, your tax will be $88K, saving you $22K in taxes.
Also, the higher the tax bracket, the more the savings.
