High 401K Balance, RMD's and Withdrawal Strategies

[jollystomper]

Interesting. I have exactly the same % in tax-deferred as the OP. We intend to follow a similar strategy in spending down taxable (primarily cash) money before SS hits. My pension though pushes my marginal tax bracket high enough (22%) so that my analysis shows that Roth conversions now will put me into the 24% tax bracket, and I will remain in that bracket when SS and RMDs after Roth hit. However, not knowing what tax rates will be after 2028, and of course no guarantee on how long DW and I will both be around and avoid single person tax rates, I am going to start doing some Roth conversions this year. Overall there are much worse problems to have.

[orplanner]

Quote:

Originally Posted by RIGM So I just used the basic I-ORP (I haven't explored the advanced version yet). I need to look at this a bit more, but my initial conclusion is that I'm not a fan. Here's why: - Biggest reason is that I-ORP completely excludes any Roth conversions. This is the big question I was trying to answer. As a justification, they state that a referenced study says that conversions "offer little economic advantage," but the study itself states conversions reduce tax by 19% and increase disposable income by 1%. How is that not advantageous? Maybe for the average person with the average Tax Deferred account, the conversion doesn't matter. Then again maybe it does, even for them, with lower tax rates in effect now. Certainly with 63% of my assets in Tax Deferred status, it has to be a matter considered in my planning. - It plans for a life expectancy of 92. Joint life tables show a considerable probability that one or the other spouse will live longer than that. I just looked at a joint life probability table: for a "white collar" man and woman, both 60, there is a 53% probability that at least one will be alive at 93. It seems age upon death should be a configurable value in I-ORP since we all have different genes. - It assumes you sell your house at age 80. Huh? The age thing and the configurable thing again. - It assumes 2% inflation. That is what I used (and even then we both could be wrong - no way to do any sensitivity analysis in I-ORP on that). - It assumes a 4% increase in spending in retirement. I have not read the referenced study, but there is other research out there that indicates spending declines significantly over time in retirement. I assumed in my model that spending would be constant, adjusted for inflation. - It assumes a 7% equity rate of return and 3.5% rate of return on bonds. I believe that in this market, that is too high. I used a blended rate of return of 2% above inflation, both because the market is high (CAPE index) and to be conservative. I will look at the advanced version of I-ORP, but I'm initially not impressed.

Essential ORP, which you are evaluating here, is intended for novice users. All of the default values you cite are conventional wisdom.

Extended ORP is for users whose own wisdom is preferred to conventional wisdom. Extended ORP allows the experienced user to set any one or all of 108 different parameters, including those cited above..

[orplanner]

Quote:

Originally Posted by Marc carpe diem , quam minimum credula postero Marc

For those of us who slept through high school Latin:

In Horace, the phrase can be translated as "Seize the day, put very little trust in tomorrow (the future)".

That pretty much sums up the field of retirement planning.

[RIGM]

Quote:

Originally Posted by pb4uski How does that work?

Please see attached pdf; a post would have been too long. While not my numbers, it discusses a hypothetical couple drawing from the tax deferred account first and using that for living expenses and paying taxes versus drawing from the taxable account first and separately doing Roth conversions from the tax deferred account. There are pros and cons to each, but the latter plan has, I think, some distinct advantages (which may or may not be important or valuable to individuals at differing income levels).

As an aside, I found this issue to be nearly inscrutable. The spending sequencing options available are numerous. There are some clearly wrong ways to sequence the spending, but I found that the differences were not so great among many other sequencing options. As general guidance, it seems the best plan is to try to level load the tax rate throughout retirement.

To the point of level loading the tax rate, I've also included two charts. One shows my average tax rate under the sequencing plan I intend to follow, and the second shows my average tax rate if I do no spending from the tax deferred account in my 60's (no Roth conversions or draws for living expenses - this is one of those "clearly wrong" plans).

[H2ODude]

Not being critical, but it seems a lot of people here spend a lot of effort in trying to know the unknowable. Things like when to take SS, how much Roth conversion, minimizing tax implications of withdrawals. It seems to me the likely answers depend on individual circumstances, but the definitive answer is still questionable. Why? because longevity is unknown (but admittedly one can adjust estimates based on past health and family), tax rates can change, etc. And of course there's market performance and inflation. I used to think I was pretty financially savvy but have lost interest planning these decisions out; I guess one reason being that a ~3% WR for us generates more income than we need or care to spend. Yeah, there'll be a bunch left. I do care about steering it to as good an end result as is likely, but have decided to a)switch to full SS at 70 because we're both pretty healthy and b) now in late sixties have and will continue to Roth convert about what the calculators say our MWD would be if we were 70-1/2 this year. So that levels out the taxable income regarding IRA withdrawals, and when our SS jumps from~$18k to ~$40k we'll just plan that a bunch will go to taxes for the torpedo.

I don't think slicing and dicing all the alternatives is likely to reveal a substantially reliable improvement for us. Years ago I plugged through that I-orp and it had me converting all our tiRA (about 1.6mm) to Roth and that made no sense to me. Meanwhile tax rates have been lowered so had that been known how would that have affected the model? I spent my career trying to predict water demands and source sufficiency (which actually bears a lot of similarities to retirement financial planning) and I guess I've been infected with a strong case of the "eh, who knows?" Add to that the fact I retired in 2011 and the markets have skewed our income sustainability WAY up in that time, and I just don't seem to have the interest in predictions since the past have been way conservative. As they say, YMMV, and perhaps all these analytics will result in some great benefits for many. Meanwhile we'll just spend all we care to and likely leave a bunch to charity and the kids, and yeah we might have paid a tad more to the tax man if we'd modeled it all better.

[RIGM]

I completely agree that there are a lot of unknowns, and those can change plans massively. Still, most of us got here through planned actions in the past, and uncertainty to me isn’t a reason this should be not be planned going forward. I wasn’t going to spend a lot of time on this decision, but then realized differences in plans would be hundreds of thousands of dollars. That was worth a couple of days of my time.

[Hermit]

Quote:

Originally Posted by Marc One other thing to look at is IRMAA. Even with indexing starting next year, I think we will be just over the IRMAA cliff when we start Medicare in 2022/2023. Although I aim to stay right below the top of the 22% bracket (income for living and any ROTH conversions), I am thinking I might have to move up to 24% bracket in alternating years just to halve the impact of IRMAA; I think it will be around $270 per month for the two of us if we go over the cliff. Marc

If you do not include the effects of possible IRMAA fees (taxes) your calculations post age 65 may be way off. I have not seen any discussion on this part of the equation except the above post. 28% tax bracket is IRMAA territory. This is especially painfull if one spouse dies.

[target2019]

Quote:

Originally Posted by H2ODude Not being critical, but it seems a lot of people here spend a lot of effort in trying to know the unknowable. Things like when to take SS, how much Roth conversion, minimizing tax implications of withdrawals. It seems to me the likely answers depend on individual circumstances, but the definitive answer is still questionable. Why? because longevity is unknown (but admittedly one can adjust estimates based on past health and family), tax rates can change, etc. And of course there's market performance and inflation.

I bolded one part of your post for explanation. Those things are knowable, IMO, but only at the end of each tax year, or in the month(s) leading up to a decision. Take Roth Conversion, for example.

Something like i-ORP goes way beyond "what I need to know this year." 30-year projection is ok for overall understanding, but there is just one decision to make. So I appreciate all the reports and columns of i-ORP, but my own choice(s) need to be driven by something home-grown. That's why I value this thread. Some actually shared how there decision was made.

[H2ODude]

Maybe my post was more generic than specific to the exact topic of the thread. You're right that annual decisions can be fact based, I'm more saying that the tendency to analyze over long futures has to rely on assumptions of a lot of factors.

[orplanner]

Quote:

Originally Posted by target2019 Something like i-ORP goes way beyond "what I need to know this year." 30-year projection is ok for overall understanding, but there is just one decision to make. So I appreciate all the reports and columns of i-ORP, but my own choice(s) need to be driven by something home-grown. That's why I value this thread. Some actually shared how there decision was made.

This Journal of Financial Planning paper recognizes that retirement planning is done in the context of a 30 year plan but executed one year at a time:


A Three Step Procedure for Sustainable Retirement Savings Withdrawals

Anecdotal evidence indicates that some ORP users run ORP annually to determine their savings withdrawals for the current year and their disposable income for the year's spending budget. This study demonstrates that from a historical perspective this is a safe and efficient policy.
Journal of Financial Planning 30 (8): Pages 45-55.

https://www.onefpa.org/journal/Pages...thdrawals.aspx

[LawyerMarkham]

NEW LAW MAKES MAJOR CHANGES TO IRAs.
The "Setting Every Community Up for Retirement Enhancement Act of 2019" will go into effect after December 31, 2019.
Age cap repeal. The Act removes the age cap for traditional IRA contributions, which is currently 70 1/2. This change would allow older workers to stash a chunk of their earned income in a traditional IRA, just as they can currently in a Roth IRA.
RMD age increase. The House bill increases the starting age for required minimum distributions from retirement accounts to 72, from 70 1/2 currently.
Stretch IRA loss. Although the Secure Act may benefit some retirement account owners, it’s not so friendly to nonspouse heirs. The legislation erases these heirs’ ability to stretch out required minimum distributions from inherited retirement accounts over the nonspouse heirs’ own life expectancies—a move that allows more of the money to grow tax-deferred and minimizes the heirs’ income tax bill. Instead, the legislation mandates that the inherited assets be withdrawn within 10 years.

I also want to respond directly to the RIGM's post concerning High 401K Balance, RMD's and Withdrawal Strategies, but I thought it would be important for everyone to consider these IRA law changes in their future planning.

[SecondCor521]

The above post implies something prematurely. It will only "go into effect" if it is enacted. According to the following link, the bill has only passed the House as of now.

https://www.congress.gov/bill/116th-...ouse-bill/1994

[LawyerMarkham]

You are absolutely correct. I apologize. I should have said that it only passed the house. Yet, the Act has bi-partisan even among Senators. I can't find any comentators who say it won't pass. In fact, all I've seen say it will pass.
Until it does, it doesn't hurt to be aware that its out there.

[RunningBum]

And we are aware:

http://www.early-retirement.org/foru...2-a-97142.html

[2177V]

People should be aware that an inherited IRA can taxed as retirement income by your children so having a very large IRA may be a future tax liability on your children...especially if your children is a high earner and has the potential of a higher retirement pay.

On the other hand, an inherited property has a "stepped up basis" tax advantage at the time of death of the surviving husband or wife. This means if the inherited property is sold by your children, there is potentially less of a future tax liability. This assumes that the property does not trigger the ridiculously high estate tax threshold of $11.4M.

I am currently reducing the money in my IRA and increasing the number of properties that I own. My additional properties provide rent income which replaces some of the income from my IRA.

Consider some estate planning to avoid letting the government getting more money from your estate than the government deserve.

[pb4uski]

Quote:

Originally Posted by vchan2177 .... Consider some estate planning to avoid letting the government getting more money from your estate than the government deserve.

WADR, for tax deferred money the government would only be getting the tax that you voluntarily avoided when you deferred that income.... why do you think that they don't deserve to ultimately collect ta on that income.

So by reducing your IRA contributions now you are paying more taxes now which means that your heirs will get less, albeit without any tax liability.

The only way your reduction of tax-deferred contributions comes out ahead is if the taxes that you pay now are less than what they would pay later... IOW, if their marginal tax rate is more than yours.

[SecondCor521]

Quote:

Originally Posted by LawyerMarkham You are absolutely correct. I apologize. I should have said that it only passed the house. Yet, the Act has bi-partisan even among Senators. I can't find any comentators who say it won't pass. In fact, all I've seen say it will pass. Until it does, it doesn't hurt to be aware that its out there.

To allude to an old fable, maybe the horse will talk.

[jollystomper]

Quote:

Originally Posted by H2ODude Not being critical, but it seems a lot of people here spend a lot of effort in trying to know the unknowable. Things like when to take SS, how much Roth conversion, minimizing tax implications of withdrawals. It seems to me the likely answers depend on individual circumstances, but the definitive answer is still questionable.

One reason I spend the effort is not so much trying to know the unknowable, but to what degree the unknowable options really make a difference that I feel is worth it.

For example, suppose my scenarios for analyzing whether or not to do 401K to Roth IRA conversions shows that the difference may be $100K savings over a lifetime based on various assumptions. My questions becomes, is it worth it? Sure, some feel that every nickel of taxes they can avoid is worth it... but if the difference is not going to impact your retirement lifestyle, or it means means you leave your heirs 1.5 million instead of 1.6 million, why worry about the topic anymore, just say "what happens, happens" and do not worry about doing the conversions.

So for me, it is less about finding the definitive answer, and more about seeing if even matters to find a definitive answer.

[Hermit]

Quote:

Originally Posted by LawyerMarkham NEW LAW MAKES MAJOR CHANGES TO IRAs. The "Setting Every Community Up for Retirement Enhancement Act of 2019" will go into effect after December 31, 2019. Age cap repeal. The Act removes the age cap for traditional IRA contributions, which is currently 70 1/2. This change would allow older workers to stash a chunk of their earned income in a traditional IRA, just as they can currently in a Roth IRA. RMD age increase. The House bill increases the starting age for required minimum distributions from retirement accounts to 72, from 70 1/2 currently. Stretch IRA loss. Although the Secure Act may benefit some retirement account owners, it’s not so friendly to nonspouse heirs. The legislation erases these heirs’ ability to stretch out required minimum distributions from inherited retirement accounts over the nonspouse heirs’ own life expectancies—a move that allows more of the money to grow tax-deferred and minimizes the heirs’ income tax bill. Instead, the legislation mandates that the inherited assets be withdrawn within 10 years. I also want to respond directly to the RIGM's post concerning High 401K Balance, RMD's and Withdrawal Strategies, but I thought it would be important for everyone to consider these IRA law changes in their future planning.

The SECURE act will screw up my planning totally. All of my retirement stash was moved from a 401k to an IRA a couple of years ago in preparation for doing QCDs starting in 2020. I don't have anything outside of the IRA. My income, including IRA withdrawal, is at the top of the 22% bracket and just under IRMAA. In other words, converting to Roth would trigger major additional taxes. A donation to the charity using a withdrawal from the IRA will also trigger those additional IRMAA taxes but would keep the charity's plans on schedule while adding thousands of dollars to my taxes. So far as wealth transfer, it looks like Uncle Sam has just made himself a much larger bennificiary to my estate.

[audreyh1]

Quote:

Originally Posted by Hermit The SECURE act will screw up my planning totally. All of my retirement stash was moved from a 401k to an IRA a couple of years ago in preparation for doing QCDs starting in 2020. I don't have anything outside of the IRA. My income, including IRA withdrawal, is at the top of the 22% bracket and just under IRMAA. In other words, converting to Roth would trigger major additional taxes. A donation to the charity using a withdrawal from the IRA will also trigger those additional IRMAA taxes but would keep the charity's plans on schedule while adding thousands of dollars to my taxes. So far as wealth transfer, it looks like Uncle Sam has just made himself a much larger bennificiary to my estate.

I do not believe a QCD from the IRA will trigger additional IRMAA payments.

Is the proposed legislation changing how QCDs are taxed?

Or is it simply that the timeline is pushed back a year or two?