Too much money in IRA

[evilanne]

In my case, Schwab's estimator (with a reasonable growth projection) tells me I will have a 115K RMD when I first draw at 73.

While I welcome the idea of getting 115K I don't welcome the idea of what that will do to me tax wise (federal, state, IRMAA) on single filer on top of a pension plus social security. Yes, I know, a good problem to have.

Yes, it very much depends on the individual or couple. If I had no pension or less expected social security or was MFJ, it would be less of an issue.

It looks like the only variable you have control over is your marital status...so
maybe there is some poor old soul out there for you

 

[evilanne]

Ok, but it's not generally the best idea to do your *entire* Roth conversion for the year early on.
Once December gets here, you'll have a good idea what your total income for the year will be and then you can do a year-end Roth conversion to get your AGI up close to the next IRMAA bracket...

Another good time to do conversion is when there is a pull back in the market...you pay less in taxes and you get the upside in the Roth with the recovery.

 

[audreyh1]

Thanks. Yes, I am aware of this and may do some of this. I already have a DAF set up that I did prior to the tax law changes (before the standard deduction was raised). Still working at using that money, which also grown (partially offsetting donations) as the market went up.

DAFs are not qualified for QCDs and can’t be donated to directly from your IRA to count towards your RMD. Just so you know.

 

[Exchme]

Thanks to this thread I drew up a scenario to even out income and avoid the large portfolio draw around age 95. Of course, who knows if I would be around to see this.

Anyway, if you look at my chart, with inflation compensated, the additional draw in the early years would be put into Roth conversion.

My worry is this: The total amount of accumulated income generated using this method is 86pct of what it is with RMDs only. Is this a potential flaw?, this needs to be compensated by the tax savings.

You can only value the portfolio if you tax-adjust for the fact that the money in the IRA can't generally be used without paying taxes on it, either by your or your heirs. The exceptions to needing to tax adjust would be doing QCDs, bequests to charities and paying for long term care.

If you don't tax adjust, then you will very often see this effect, where the simple total of the account values is lower, even though the after-tax value may be higher.

There are other tax considerations like maximizing ACA premium credits, avoiding the maximum taxation of SS benefits, minimizing LTCG taxes and minimizing IRMAA expenses that play into the analysis and that often means that a flat AGI isn't optimal.

For instance, we converted to the top of the 24% bracket for a couple of years before we were 63, then last year converted to the top of the 3rd IMRAA tier and will do the same this year and next (as defense again TCJA expiring) and then stay within the base IRMAA tier until I claim SS at 70. Then no more conversions as that will give a few years of minimizing taxes on SS benefits before RMDs start. Of course only the current year is actionable, the rest of the plan just has to be worked out to make sure the current year actions are sensible.

Unless you enjoy learning and programming details of the tax code, I would get one of the pre-made tools like the bogleheads.org Retiree Portfolio Model (fairly sophisticated free spreadsheet, but with a steep learning curve as the needed input is sort of sprawled out all over) or pony up a few $ for one of the consumer grade tools - my favorite is Pralana Gold, a paid Excel sheet that will soon switch to a web app, the tax modeling and flexibility are amazing.

 

[iloveyoga]

My amounts are not alarmingly high, but this thread did make me take a look at potential RMD in 7 years. I think it will be ok, but in the meantime I can continue to modestly draw down my IRA as needed, so that is good reassurance.

 

[copyright1997reloaded]

DAFs are not qualified for QCDs and can’t be donated to directly from your IRA to count towards your RMD. Just so you know.

Yes, I know....but thanks for the reminder (and for others).

 

[kgtest]

I know one way someone was able to do a ridiculous mega backdoor roth conv. After the sale of a practice that created significant losses on the balance sheet.

I was always wondering how my DFIL could have 0 money in tax deferred. But he did mention in one single swift moment, in a completely different conversation, that not all business sales are profitable business sales.

It didn't dawn on me years later how he probably executed mega backdoor conversions in that year(s) that he was taking massive business losses during and post med practice sale.

 

[perinova]

...

Yes it gets complicated fast. I am still working on what will be my plan.
I noticed:
- No matter what (Roth conversions or not), I probably will always land in the same tax bracket as they are drawn today (the 22% one). THis is because of the SS and other taxable income.
- Under 65yo, for both of us, it seems reasonable to stick to a minimum income because ACA subsidies are so attractive.
- IRMAA is a definite concern.Need to make sure that trying to avoid it doesn't override other financial concerns. It is very complicated given the 2 years look back.

Biggest financial concern, IMO, is state/local taxes, as I just calculated what we could save moving out of California, saving will vary from nothing to ~$15k/year. But that is a subject for another thread.

 

[Dtail]

Yes it gets complicated fast. I am still working on what will be my plan.
I noticed:
- No matter what (Roth conversions or not), I probably will always land in the same tax bracket as they are drawn today (the 22% one). THis is because of the SS and other taxable income.
- Under 65yo, for both of us, it seems reasonable to stick to a minimum income because ACA subsidies are so attractive.
- IRMAA is a definite concern.Need to make sure that trying to avoid it doesn't override other financial concerns. It is very complicated given the 2 years look back.

Biggest financial concern, IMO, is state/local taxes, as I just calculated what we could save moving out of California, saving will vary from nothing to ~$15k/year. But that is a subject for another thread.

I delayed any Roth conversions for me under 65 y.o. due to the ACA subsidies being a more lucrative choice.

 

[sengsational]

Some people are totally missing the point. The thread title is not about "too much money". It is about "in an IRA", as opposed to other types of accounts. The issues are items like:

• 15% LTCG rates whenever you need to withdraw vs. 22%-24% (marginal) on forced withdrawals based on your age (and of course no tax on principal)
• No tax loss harvesting or foreign tax credits
• Roth conversions eating up ACA and other tax breaks
• No step-up basis

Some of us got the point the first time. Others just like to argue.

Those two posts are right-on the mark

One of the reasons this is a "hard problem" is because you need to figure your taxes from now untill "Plan Sunset" which might be both of a couple moving on, or even after that...when the beneficiaries are done paying taxes.

It's been a while, but last time I checked, i-orp was limping along, but without the support of it's author. But it gave you the ability to switch Roth conversions on and off, and used RMD's. It's probably not been updated to use the latest RMD age, but still might offer a worthwhile data point. Most people say it recommended excessive magnitude Roth conversions. But I like it because it reminds me that the difference between an "optimal" strategy and something else just isn't that much different (at least in my case).

 

[USGrant1962]

Those two posts are right-on the mark

One of the reasons this is a "hard problem" is because you need to figure your taxes from now untill "Plan Sunset" which might be both of a couple moving on, or even after that...when the beneficiaries are done paying taxes.

It's been a while, but last time I checked, i-orp was limping along, but without the support of it's author. But it gave you the ability to switch Roth conversions on and off, and used RMD's. It's probably not been updated to use the latest RMD age, but still might offer a worthwhile data point. Most people say it recommended excessive magnitude Roth conversions. But I like it because it reminds me that the difference between an "optimal" strategy and something else just isn't that much different (at least in my case).

The hardest problem is that you needed to understand this 20 years ago when you were maxing contributions to your traditional IRA or 401(k). In my case, a more balanced approach would have been better. Now I'm somewhat stuck at 68% of my portfolio in tax deferred. Which is down from around 75% when I retired from megacorp.

 

[sengsational]

^ Agreed. Back then we were following the "obvious" goal to shift income to a period of time without a paycheck. I certainly wasn't running any models to say when to quit pushing savings into the tIRA/401k.

 

[Koolau]

The hardest problem is that you needed to understand this 20 years ago when you were maxing contributions to your traditional IRA or 401(k). In my case, a more balanced approach would have been better. Now I'm somewhat stuck at 68% of my portfolio in tax deferred. Which is down from around 75% when I retired from megacorp.

^ Agreed. Back then we were following the "obvious" goal to shift income to a period of time without a paycheck. I certainly wasn't running any models to say when to quit pushing savings into the tIRA/401k.

Yeah, I thought I was doing all the right stuff way back when. I never guessed it would turn into a tax bomb in my twilight years.

 

[Healthy Lifestyle]

The hardest problem is that you needed to understand this 20 years ago when you were maxing contributions to your traditional IRA or 401(k). In my case, a more balanced approach would have been better. Now I'm somewhat stuck at 68% of my portfolio in tax deferred. Which is down from around 75% when I retired from megacorp.

Almost 40 years ago, the financial world and government pushed the tax deferred 401K plan as it was about to replace the tradition pension.

So blindly, most workers my age loaded up thinking that we could all
eventually join the 2 comma club if we were diligent savers.

Years later, baby boomers have a big tax problem in their traditional IRA's, with RMD's, etc. are lurking. Is this a good problem to have? I guess so.

 

[Koolau]

Almost 40 years ago, the financial world and government pushed the tax deferred 401K plan as it was about to replace the tradition pension.

So blindly, most workers my age loaded up thinking that we could all
eventually join the 2 comma club if we were diligent savers.

Years later, baby boomers have a big tax problem in their traditional IRA's, with RMD's, etc. are lurking. Is this a good problem to have? I guess so.

Agree that it's the kind of problem to have vs eating cat food in retirement. However, I'd sure have liked to have had 20:20 FOREsight rather than 20:20 HINDsight. Oh, well. It is what it is and now I'm dealing with it as best I can. YMMV as always.

 

[statsman]

The hardest problem is that you needed to understand this 20 years ago when you were maxing contributions to your traditional IRA or 401(k). In my case, a more balanced approach would have been better. Now I'm somewhat stuck at 68% of my portfolio in tax deferred. Which is down from around 75% when I retired from megacorp.

I've been thinking about tax implications of our tax deferred accounts with DW needing to make her first RMD next year. We're sitting at 41% of investable assets in tax deferred. I thought that was bad enough.

 

[Fermion]

ACA is preventing me from doing more conversions. It is a $15,000 bird in the hand now vs converting and paying tax on the conversion plus not getting as big a subsidy.

Maybe we will regret this when these RMD come calling in 17 years...

 

[RunningBum]

Almost 40 years ago, the financial world and government pushed the tax deferred 401K plan as it was about to replace the tradition pension.

So blindly, most workers my age loaded up thinking that we could all
eventually join the 2 comma club if we were diligent savers.

Years later, baby boomers have a big tax problem in their traditional IRA's, with RMD's, etc. are lurking. Is this a good problem to have? I guess so.

People who think they deferred too much income might want to look at tax rates back when they first started. See https://taxfoundation.org/data/all/federal/historical-income-tax-rates-brackets/

They also should think about whether they got the company match on 401K contributions. Contributing to get matched dollars almost certainly makes that a good decision to this day. Contributing beyond the match point, maybe not, but I didn't start doing that until I was making a lot more money than my starting wage out of college, so I'm ok with it. I think my marginal rate was 31% or higher when I was maxing my 401K contributions, and I won't be converting or withdrawing at that high of a rate. Maybe I could've done better investing that extra money in taxable index funds, to eventually be taxed at LTCG rates. I'd have to run a spreadsheet for that, and I'm not too interested since I can't reverse that decision. I have advised my son to get the match and contribute nothing more.

Maybe these huge 401K/IRA balances are part of a successful plan, and in retirement, you are merely paying back only a portion of the taxes you would have owed while working

Another part of that successful plan may be to convert some of it to a Roth if you have a window between your last paycheck and the start of collecting SS and taking RMDs.

 

[GrayHare]

IIRC 40 years ago cap gains did not get preferential tax rates, thus there was no penalty for cap gains within a tIRA. When cap gains started being taxed at lower rates, I mistakenly thought they'd be subject to that lower rate upon their withdrawal from the tIRA.

 

[Gumby]

People who think they deferred too much income might want to look at tax rates back when they first started. See https://taxfoundation.org/data/all/federal/historical-income-tax-rates-brackets/

A lot of my 401k contributions were made when I was paying north of 39% in federal taxes and another 8% to the State of New York. So it was an easy decision and I do not regret it now.

 

[Exchme]

People who think they deferred too much income might want to look at tax rates back when they first started. See https://taxfoundation.org/data/all/federal/historical-income-tax-rates-brackets/

They also should think about whether they got the company match on 401K contributions. Contributing to get matched dollars almost certainly makes that a good decision to this day. Contributing beyond the match point, maybe not, but I didn't start doing that until I was making a lot more money than my starting wage out of college, so I'm ok with it. I think my marginal rate was 31% or higher when I was maxing my 401K contributions, and I won't be converting or withdrawing at that high of a rate. Maybe I could've done better investing that extra money in taxable index funds, to eventually be taxed at LTCG rates. I'd have to run a spreadsheet for that, and I'm not too interested since I can't reverse that decision. I have advised my son to get the match and contribute nothing more.

Maybe these huge 401K/IRA balances are part of a successful plan, and in retirement, you are merely paying back only a portion of the taxes you would have owed while working

Another part of that successful plan may be to convert some of it to a Roth if you have a window between your last paycheck and the start of collecting SS and taking RMDs.

Thanks for the link to historical tax rates. It shows me that I deferred a lot of income that would have been taxed at 28-35% over the years and since I didn't do more than what was needed for the company match until late in my career when my income was high, I have no regrets either.

 

[Koolau]

I've been thinking about tax implications of our tax deferred accounts with DW needing to make her first RMD next year. We're sitting at 41% of investable assets in tax deferred. I thought that was bad enough.

Ever since retirement, I've w*rked diligently to lower the tax deferred ratio from well over 60% to now just under 30%. I've done three things: 1)Roth converted (and paid the taxes); 2)RMD'd/spent from tax deferred (and paid the taxes); 3)Grew the Roths and non-tax-deferred funds MORE than the tax-deferred funds.

And STILL, my RMDs are increasing because: 1)Tax-deferred funds are STILL increasing in value faster than I can RMD/spend them; 2)I'm getting older and the "Distribution Period" (divisor) keeps getting smaller (larger % RMD.)

It sorta sounds like bragging, but it's not intended to sound like that. Still, other than having to (finally) pay my "fair share" - whatever THAT is - it's probably pretty good news and, at worst, it's a 1st world problem that's so preferable to a cat-food diet, that it probably doesn't bear repeating - but I will repeat it - often. YMMV

 

[Healthy Lifestyle]

Ever since retirement, I've w*rked diligently to lower the tax deferred ratio from well over 60% to now just under 30%. I've done three things: 1)Roth converted (and paid the taxes); 2)RMD'd/spent from tax deferred (and paid the taxes); 3)Grew the Roths and non-tax-deferred funds MORE than the tax-deferred funds.

And STILL, my RMDs are increasing because: 1)Tax-deferred funds are STILL increasing in value faster than I can RMD/spend them; 2)I'm getting older and the "Distribution Period" (divisor) keeps getting smaller (larger % RMD.)

It sorta sounds like bragging, but it's not intended to sound like that. Still, other than having to (finally) pay my "fair share" - whatever THAT is - it's probably pretty good news and, at worst, it's a 1st world problem that's so preferable to a cat-food diet, that it probably doesn't bear repeating - but I will repeat it - often. YMMV

Agree, I am planning on doing the same, but my future RMD income will be higher than I need it to be, since my stealth taxes are also attached to it.

 

[Rocky mtn high]

Met a dr once who had absolutely everything in an ira(6m). No savings outside. Had house and car debt. I also told him too much in ira.