Dumb future RMD taxation question

[jabbahop]

I am trying to estimate what our RMD’s will be and what that does to future taxes (the old roth conversion question).

How do folks estimate their future RMD/tax implications?

I was using one of the online calculators and started to plug that into our tax estimator but then wondered if I should actually be plugging inflation adjusted return values vs nominal values? Should I assume that tax brackets will be adjusted in future?

Since we are 58 and 60, nominal vs real returns make a huge difference in terms of RMD’s especially in the out years.

 

[braumeister]

Should I assume that tax brackets will be adjusted in future?

You'll never get an exact estimate.

The RMD process is simple. Your tax-deferred total balance as of December 31 is divided by the factor for your age in the IRS table and that's your RMD amount for the following year. So it will change over time.

 

[pb4uski]

Tax brackets are adjusted for inflation by law, so if it were me I would take my IRA balance today, adjust it to age 70 1/2 using a real return, and then divide that balance by the RMD factor for age 70 and use that amount for the calculator.

By accreting your IRA growth at a real return rather than nominal you are effectively reflecting inflation of tax brackets in a backwards way.

If you want to do more work then grow your tIRA at a nominal rate and then grow tax brackets at inflation.

 

[jabbahop]

Thanks PB4 and Brau - that is exactly what I was thinking of doing - just wanted to make sure my assumptions were correct.

 

[corn18]

Might want to give i-ORP a go and see what it indicates. It has been my goto model for conversions and tax estimates.

 

[MissMolly]

Vanguard has an RMD Estimate calculator you might find handy:

https://personal.vanguard.com/us/insights/retirement/estimate-your-rmd-tool

 

[RunningBum]

Don't forget to factor in the taxable part of your SS benefits and any pension. These are why some of us are trying to get our tIRAs converted before those kick in, because they will either kick us in to a higher tax bracket, or cause more of the SS benefit to be taxed, or both.

 

[Cobra9777]

My spreadsheet uses nominal dollars because that's how my brain is wired. So I inflate brackets and the standard deduction... as well as anything else that makes sense like SS, COLAed pension, rental income. I also assume that individual tax brackets revert to higher rates in 10 years, per current law.

I retired at 52 and quickly discovered that the assumed rate of growth on the tIRA is the critical variable. Either way, the conclusion for me is pretty simple: convert to the top of the 12% bracket. Beyond that, the potential upside is far less compelling and the downside risk becomes more plausible... low returns=lower RMD tax vs prepayments on conversion.

 

[jebmke]

Tax brackets are adjusted for inflation by law, so if it were me I would take my IRA balance today, adjust it to age 70 1/2 using a real return, and then divide that balance by the RMD factor for age 70 and use that amount for the calculator.

By accreting your IRA growth at a real return rather than nominal you are effectively reflecting inflation of tax brackets in a backwards way.

If you want to do more work then grow your tIRA at a nominal rate and then grow tax brackets at inflation.

This is essentially what I do. Our IRAs are all in bonds so I simplify it even further by assuming that the real return on bonds is going to be zero. I doubt I will be that far off.

 

[Fedup]

I roughly guesstimate a conservative number. I also did run some i-orp too. But there are some flaws to that too.