RMD going to 72?

[steelyman]

True, if the money is being spent. But if it is just being withdrawn to meet the requirements of the law, it can be immediately reinvested in whatever asset type it was in before, so no potential for being "stung" by a temporary price dip, and no real impact on the desirable asset allocation (as far as I can tell)

That’s a good point. Speaking only for myself, it’s likely I will spend at least a portion of withdrawals. I think the original owner would have wanted me to enjoy/benefit from the account they saved. My personal retirement accounts (my earnings) I view and manage/use differently.

 

[aza455]

True, if the money is being spent. But if it is just being withdrawn to meet the requirements of the law, it can be immediately reinvested in whatever asset type it was in before, so no potential for being "stung" by a temporary price dip, and no real impact on the desirable asset allocation (as far as I can tell)

There is no need to “reinvest” anything. Just move your shares in-kind from the tax-deferred account to your after-tax account to satisfy your RMD requirement.

 

[audreyh1]

Why on earth does Washington want to "ensure" that I spend my savings before I die? Can't I incorporate any and all assets I have of every kind into my estate planning? Yikes!! Talk about big brother. We all know that the clear intent was to make the bill revenue neutral, regardless of what they may publish.

They actually aren’t trying to ensure you spend those funds. They just want the deferred taxes paid.

 

[FIREchief]

They actually aren’t trying to ensure you spend those funds. They just want the deferred taxes paid.

Except..... That's not what they just said:

Originally Posted by pb4uski
I just saw this nugget in the House Ways and Means Committee summary of the bill and it was relevant to our discussion earlier so I post it:

Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.

 

[pb4uski]

We got ourselves a one-trick pony!

I agree with you, but that's not what they said!

Except..... That's not what they just said:

The document was poorly worded. Get over it.

 

[audreyh1]

Except..... That's not what they just said:

It’s a very bad habit that many folks have is to use the word “spend” when they mean withdraw. It was a dumb way to put it. But maybe they are that confused and think any funds withdrawn from an IRA are immediately spent. Certainly there are many individuals who don’t realize they can simply reinvest their RMD after taxes if they don’t need the income.

 

[audreyh1]

If I'm going to withdraw tIRA assets and pay taxes on them, why wouldn't I instead Roth convert them? The tax cost would be the same. Who wouldn't rather have a Roth dollar than an after-tax dollar?

Once you reach RMD age, your annual RMD can’t be converted to a Roth IRA. Only withdrawals exceeding the RMD can be converted.

 

[samclem]

I haven't found much value in even trying to discern the drafter's intent behind legislation like this. There is no single drafter, and often there is no coherent "intent," and it wouldn't matter if there was. The only thing of importance is the impact.

 

[FIREchief]

We got ourselves a one-trick pony!

The document was poorly worded. Get over it.

Let's see... When you post it "it was relevant to our discussion." When I post it I need to "get over it." Yeah, that makes a whole lot of sense.

 

[FIREchief]

Once you reach RMD age, your annual RMD can’t be converted to a Roth IRA. Only withdrawals exceeding the RMD can be converted.

The context of the post being responded to was not RMDs. It was voluntary additional withdrawals from a tIRA.

 

[Helena]

Yeah, I've read mentions of this for quite a few years. It's funny, because when comparing the two big tax expenditures, employer health care and retirement savings, the former is tax revenue lost forever, while the latter is just tax postponed - yet both are described using the same "tax income lost" language. In my mind, they're not the same.

There has also been discussion for quite a few years about taxing employees for their employer paid health care insurance.

.

 

[pb4uski]

^^^ and it probably should be taxed... or people who pay for their own health insurance should be able to deduct their premiums paid or a significant portion of premiums paid outside of itemized deductions... directly like HSA contributions... to level the playing field.

However, given the broad range of employer contributions to cost, it would be easier to just have income used to pay for employer coverage taxed.

If an employer pays for an employee's personal expenses, like country club dues, it is considered to be income.... it seems health insurance is a personal expense as well.

In 1953 the IRS issued a revenue ruling that effectively reversed its previous stance, declaring employer contributions to employee health insurance plans to be taxable income for the employee. Congress, however, was having none of it, and lawmakers soon schooled the agency in the new realities of U.S. health policy. The Internal Revenue Code enacted in 1954 included section 106, clearly establishing such contributions as exempt from income taxes (and, in a separate section, exempt from payroll taxes as well).

 

[copyright1997reloaded]

Haven't looked here at posts for a few days, so getting caught up a bit here.

The impact of elimination of stretch provisions (or limiting them to 5 or 10 years) will have an enormous impact on my estate planning.

With the current law, with an assumption of a 5% return and an assumption of my death at 90, my child would inherit over $2M. DC's starting RMD would be about $61K, increasing each year (but offset by continued growth). Assuming DC has a middle income lifestyle (let's say DC makes $60K adjusted for inflation), that $61k extra would be at the 22% federal marginal rate.

Under the new (to be passed law), DC would have to cash out the beneficiary IRA in 10 years (house) or even worse 5 years (senate). Assuming the house plan, that would be over $200K extra income per year, which would push DC to the 35% marginal federal tax rate.

I'm estimating this change will cost my heirs over $300K in additional taxes, which while I will be dead I still consider NOT GOOD.

 

[FIREchief]

Under the new (to be passed law), DC would have to cash out the beneficiary IRA in 10 years (house) or even worse 5 years (senate). Assuming the house plan, that would be over $200K extra income per year, which would push DC to the 35% marginal federal tax rate.

Once this becomes law, you might want to think about Roth converting at least some of it. That would mitigate the 35% bracket potential and would also be a key enabler for leaving qualified assets in an Accumulation Trust.

 

[copyright1997reloaded]

Once this becomes law, you might want to think about Roth converting at least some of it. That would mitigate the 35% bracket potential and would also be a key enabler for leaving qualified assets in an Accumulation Trust.

Yes, I will need to Roth convert as much of it as I can. Right now I am 'stuck' because I am drawing a pension plus working full time, plus drawing down on my previous mega-corp's 409a plan. So doing a traditional (deductible) 457 for my current employer had been the right answer. Starting 2020, I will no longer have the 409a draw down.

Assuming this passes, I will likely stop doing contributions to the traditional 457 and instead utilize the Roth variant. So that will be $25K per year. I will also do Roth conversions to get me to the top of the 24% single/HOH bracket, i.e. $160,700.

I think the real answer is to just stop w*rking. Then I would be able to do way more Roth conversion per year.

 

[RobbieB]

Yes, stop working. That's why we're here!

 

[FIREchief]

I think the real answer is to just stop w*rking. Then I would be able to do way more Roth conversion per year.

Yep. That's what I did!

 

[Sunset]

....

I think the real answer is to just stop w*rking. Then I would be able to do way more Roth conversion per year.

Yes!
You have more than enough (since you are planning to leave $2M unspent).

 

[Perryinva]

Yup. Though I have every intent not to leave that much behind. I did all this for me and DW to ENJOY, not leave behind. Heirs will get what ever is left. Luckily I appear to have no problem spending.

Not sure the new law would affect me much at all. Pensions and SS put me forever at a min of $100k income, even if DW passes first, about $130k as a couple. So the only real gains for conversion come from the current tax rate reduction which ends in 6 years. I’m not sure it makes any sense to pre pay taxes at the same rate we will be in after that. It does for the survivor, of course, but until I get through 2025 and see whats left, that amount may be the untouched emergency fund.

 

[steelyman]

The two sub-threads here seem to be changes in age for RMDs and changes to rules for withdrawals from inherited IRAs.

At least we have some warning that changes are upcoming although we don’t know exactly what they’ll be yet.

Everyone’s situation is different. In my case a big factor in decision making is that I’m a non-parent. I’ve already been taking withdrawals from my IRAs as if they were required, even though they won’t be for quite a while. I project forward from the IRS life expectancy tables and withdraw the corresponding amount, currently under 3%.

My current thinking is to suspend withdrawing from my own IRAs and instead withdraw from the inherited IRA until the account is depleted, then revert to the original plan. It’ll likely result in a larger annual withdrawal and taxable income but I’ll do what I can to monitor.

One thing of which I was unaware prior to reading about it here on e-r.org is the Medicare premium look back and IRMAA. That’ll coincide (for me) during the IIRA depletion period.

 

[pb4uski]

If it ends up that any non-spouse inherited IRA is withdrawn over 10 years as it seems to be heading then I'm not sure that your current thinking accomplishes much in $$ terms, but it might result in more simplicity because your beneficiaries will inherit one IRA rather than two IRAs.

Rather than 3% a year or whatever, why not more if you can withdraw at a low tax cost?(not sure if you can or not).

 

[Another Reader]

The two sub-threads here seem to be changes in age for RMDs and changes to rules for withdrawals from inherited IRAs.

At least we have some warning that changes are upcoming although we don’t know exactly what they’ll be yet.

Everyone’s situation is different. In my case a big factor in decision making is that I’m a non-parent. I’ve already been taking withdrawals from my IRAs as if they were required, even though they won’t be for quite a while. I project forward from the IRS life expectancy tables and withdraw the corresponding amount, currently under 3%.

My current thinking is to suspend withdrawing from my own IRAs and instead withdraw from the inherited IRA until the account is depleted, then revert to the original plan. It’ll likely result in a larger annual withdrawal and taxable income but I’ll do what I can to monitor.

One thing of which I was unaware prior to reading about it here on e-r.org is the Medicare premium look back and IRMAA. That’ll coincide (for me) during the IIRA depletion period.

I am not old enough for RMD's on my IRA's and starting this year I lowered the withdrawals on the inherited IRA's to the RMD's to avoid being subject to IRMAA for at least a year or maybe two. Looks like I'm going to have to revisit the big picture with these changes and my new-found knowledge about second generation inherited IRA's.

One question I have is whether inherited IRA's will deplete on the same schedule as they are currently required to do (first inheritor's IRS life) or if they will be subject to the same 5 or 10 year rule. If the answer convinces me it makes more sense to deplete faster and pay the additional income tax and IRMAA, then I'm going to have to retain RobbieB to advise me on how to "blow that dough."

 

[steelyman]

If it ends up that any non-spouse inherited IRA is withdrawn over 10 years as it seems to be heading then I'm not sure that your current thinking accomplishes much in $$ terms, but it might result in more simplicity because your beneficiaries will inherit one IRA rather than two IRAs.

I think you’re correct on that (it doesn’t accomplish much in $$ terms except 1) larger withdrawals and 2) withdrawals completely from a tax-deferred account rather than a tIRA/Roth mix. More likely, it’s a negative but should comply with the upcoming changes. I’m not real wild about them but rules is rules. Better than having no IRAs to think about!

Rather than 3% a year or whatever, why not more if you can withdraw at a low tax cost?(not sure if you can or not).

The approach I’ve been using seems to me to face up to the tax “torpedo”/“time bomb” earlier. Inch my way towards it little by little and no big surprise at 70-1/2, 72, or 75 (or whatever) when ordered by the tax code.

I value simplicity a lot and am not as adept at thinking like an accountant although I admire those who do. If I can “get close” I’m OK with that. But I also don’t want to risk running out of money! I think the IRS tables are more optimistic about how long I’ll be around so I’m going with the tables, hence the <3% withdrawal rate.

 

[pb4uski]

.... I value simplicity a lot and am not as adept at thinking like an accountant although I admire those who do. If I can “get close” I’m OK with that. But I also don’t want to risk running out of money! I think the IRS tables are more optimistic about how long I’ll be around so I’m going with the tables, hence the <3% withdrawal rate.

I guess my point is that if you have an opportunity to withdraw tax-deferred money at a low tax cost then do it... you don't have to spend it... you can reinvest part or all of it in a taxable account in the same investments that it was in when it was in your tax-deferred account... but the taxes are already paid and it would be eligible for a stepped up basis, resulting in more tax savings for your heirs.

If you need it later then just withdraw from that taxable account... but take advantage of all opportunities to get money out of tax-deferred at a low tax cost.

As an example, I'm 63 and will be making tax-deferred withdrawals to the top of the 12% tax bracket from now until I claim SS at 70 and pay 11-12% of the amount withdrawn in tax. Once SS starts some of my RMDs will be in the 12% bracket but most will be in the 22% bracket.

 

[steelyman]

I guess my point is that if you have an opportunity to withdraw tax-deferred money at a low tax cost then do it... you don't have to spend it... you can reinvest part or all of it in a taxable account in the same investments that it was in when it was in your tax-deferred account... but the taxes are already paid and it would be eligible for a stepped up basis, resulting in more tax savings for your heirs.

If you need it later then just withdraw from that taxable account... but take advantage of all opportunities to get money out of tax-deferred at a low tax cost.

I understand. I think the current rates are very low so it’s a good time to be taking withdrawals from tax-deferred accounts. What’s done with those withdrawals is a different/independent decision (spend or invest). I think that’s in the spirit of what you say.

My estate docs/beneficiaries will have some amount directed to charitable organizations, some to individuals. I’m thinking the charities get the tax-deferred, people get the tax-free. Or I could be one of those whose last check bounces (how fun!).