Does RMD decrease your portfolio

[bada bing]

DW's birthday was also in December, but we took the first RMD that year. Otherwise we would have to take 2X in one year.
Remember, you do NOT have to cah out your holdings. You can just transfer the RMD amount to a taxable account. That can be done over the phone.

You took a distribution for the first year that was not required. The rules are:
you must take your first RMD for the year you turn 70 1/2 .
If your birthday is in December, you will turn 70 1/2 in May the following year. For the
first year RMD, you can delay until April of the following year, but will still have a required
RMD for that year, due by the end of the year.

 

[kaneohe]

You took a distribution for the first year that was not required. The rules are:
you must take your first RMD for the year you turn 70 1/2 .
If your birthday is in December, you will turn 70 1/2 in May the following year. For the
first year RMD, you can delay until April of the following year, but will still have a required
RMD for that year, due by the end of the year.

Perhaps? they were talking about the yr they turned71 in Dec?

 

[Katsmeow]

I don't devalue tax deferred assets by the amount that will be due for taxes. However, in my projections I include expected taxes in my spending.

 

[Independent]

Why not both?

I produce a net worth report once a quarter. It has a column for before tax value and a second column for after tax value. If the actual marginal tax rate on my RMD equals the rate assumed in my second column ...

... the total of the first column will go down, but the total of the second column will stay the same.

 

[audreyh1]

No, they won't. The pre-tax value of your RMD's was always less than the IRA listed value if you pay income taxes. You just didn't factor that tax discount into your NW before you took RMD's. RMD taxes are a fact of life, like death. Never understand why folks don't discount IRA's for taxes.

Because I don’t know in advance how much tax I’ll owe, or how much I may gift in QCD either.

 

[audreyh1]

I don't devalue tax deferred assets by the amount that will be due for taxes. However, in my projections I include expected taxes in my spending.

Exactly!

Same with my taxable retirement portfolio full of unrealized gains that may or may not be passed on to an heir while I minimize realized gains during my lifetime.

 

[sengsational]

I don't devalue tax deferred assets by the amount that will be due for taxes. However, in my projections I include expected taxes in my spending.

You plan for it on the expense side, which is one option. If it's predictable and steady, that works well. I've found, by looking at i-orp, that by the time RMDs hit, tax expense is more steady. Before then, though, there can be wild swings, especially if there's ACA plays going on.

 

[jkern]

My NW number is just for fun. I don't use it for any financial calculations like expenses, budgets, income, and withdrawal rates. Therefore, I don't count taxes or any other liquidation costs in calculating NW.

 

[gerntz]

Which is one reason not to discount them, as I think/expect to move to a tax free State at some point, possibly after starting RMD's or before.

So it's a lot simpler to not discount them, as I have no idea what the tax rates will be then, so any number I use will be wrong.

OK, then just discount them for Fed taxes to be paid. If that's zero, then your view is correct.

 

[gerntz]

I don't devalue tax deferred assets by the amount that will be due for taxes. However, in my projections I include expected taxes in my spending.

Fine. But it's unavoidable required spending that you can't take out of budget like discretionary spending. Net, you'll never have that tax money in your hands. It's fictitious. So the number you're looking at is inflated vs. reality.

 

[gerntz]

Why not both?

I produce a net worth report once a quarter. It has a column for before tax value and a second column for after tax value. If the actual marginal tax rate on my RMD equals the rate assumed in my second column ...

... the total of the first column will go down, but the total of the second column will stay the same.

+1.

 

[gerntz]

Exactly!

Same with my taxable retirement portfolio full of unrealized gains that may or may not be passed on to an heir while I minimize realized gains during my lifetime.

I don't discount taxable cap gains either for the same reason. But taxes on RMD's less QCD's certainly will be realized as long as you live.

 

[Katsmeow]

Fine. But it's unavoidable required spending that you can't take out of budget like discretionary spending. Net, you'll never have that tax money in your hands. It's fictitious. So the number you're looking at is inflated vs. reality.

I don't agree. Depending on income, no taxes may be due at all. DH has to take an RMD this year. I do as well on an inherited IRA. Due to various reasons, we will not be pulling a lot out of our IRAs this year. At this point I expect that our income tax for this year will be zero to a few hundred dollars as none of our SS will be taxable. If our income was solely RMDs with no other withdrawals (most years it will be more than that), we would not owe any income taxes.

 

[CardsFan]

Fine. But it's unavoidable required spending that you can't take out of budget like discretionary spending. Net, you'll never have that tax money in your hands. It's fictitious. So the number you're looking at is inflated vs. reality.

Lets face it. Net worth is a worthless number. It is just a gauge to use to see if your investments are going up, or going down.

I don't recall Barron's or Forbes ever discounting the net worth of Bill Gates or Mark Zuckerberg when they publish their lists. In reality, if either tried to quickly liquidate, the stock would plummet, and taxes would be the least of the issue.

 

[kaneohe]

Whenever I see a discussion like this I always think of the song DGD and classmates sang at their pre-K graduation: different ways of looking at things, each w/ its merits, and the likelihood of changing others minds not too likely.

The world is a rainbow
With many kinds of people;
It takes all kinds of people
To make the world go round.

Now you be you
And I'll be me.
That's the way we were meant to be.
But the world is a mixing cup.
Just look what happens when you stir it up!

 

[mickeyd]

It would seem as we get older and we start the RMD we would be worth less because of paying taxes on that money and inflation etc..

What is your thoughts going off of history?

Your math is correct street, but if you reinvest the remainder cash (after taxes), it can actually increase your NW in the long term. Or, you can spend it on fun things and have a happier retirement. Options during retirement are wonderful.

 

[Doc0]

RMD generates taxes. That's the point of a tax DEFERRED ACCOUNT. The tax code is progressive and RMD is progressive so your portfolio is being drained double time with the tax money going to the government. When you die, your wife goes to filing single one deduction and she's really going to get the shaft. She looses you, a deduction, your share of SS income and gets taxed at a higher rate to boot. If you Roth convert the taxes get paid up front and the money grows unmolested by taxes and progressive RMD and your wife gets the money tax free. Depending on your rate of return the conversion can be more or less efficient and the time it takes for the Roth's value to over take the TIRA is variable but the Roth always wins eventually if you live long enough. If you don't live long enough you don't care, you're dead, but your wife may be able to jigger a lower tax with the flexibility it provides

 

[Koolau]

RMD generates taxes. That's the point of a tax DEFERRED ACCOUNT. The tax code is progressive and RMD is progressive so your portfolio is being drained double time with the tax money going to the government. When you die, your wife goes to filing single one deduction and she's really going to get the shaft. She looses you, a deduction, your share of SS income and gets taxed at a higher rate to boot. If you Roth convert the taxes get paid up front and the money grows unmolested by taxes and progressive RMD and your wife gets the money tax free. Depending on your rate of return the conversion can be more or less efficient and the time it takes for the Roth's value to over take the TIRA is variable but the Roth always wins eventually if you live long enough. If you don't live long enough you don't care, you're dead, but your wife may be able to jigger a lower tax with the flexibility it provides

All good points to ponder and good reasons to consider Roth conversions before RMDs kick in. The good news/bad news in my case is two fold: As I made Roth conversions, my accounts tended to outgrow what I converted. Secondly, I simply had too much (in my 401(k)) to get all of it converted. I did, however, accomplish one of my goals in converting to Roths. Both DW and I converted ALL of our tIRAs to Roths. That simplifies RMD calcs. because my only remaining deferred account is my 401(k). In fact, the 401(k) manager sends me a "note" each year, telling me exactly how much RMD I must take to satisfy the regs. Simple! I'm now taking RMDs and it's working out okay. I would (so far) be taking that amount (or more) from the 401(k) anyway - to live on. Obviously, I don't even touch my Roths at this point. My "estate" plan is to pass my Roths to DW. The 401(k), I'm trying to chip away at with my RMDs - but it keeps growing. DW will just have to pay the taxes - or find some young boy-toy tax deduction after I'm gone. Like I said, good news/bad news so YMMV.

 

[Doc0]

You have some control on your tax deferred account growth by adjusting the AA to a lower return therefore reducing SORR and leaving you a longer period of head room in your current tax bracket.. It boils down to take a bunch of risk and pay the proceeds to Uncle Sam if you win or turn down the volume a bit reduce your risk and enjoy the ride.