RMD Planning

[Route246]

My wife and I are 66;65 now but I'm trying to do some early planning for RMD. All of our current pre-tax IRA/401-K assets are in SPY or equivalent. By the time RMD happens the 401-K will be rolled into the IRA. I'm projecting $3M give or take in the IRA once the consolidation happens so I'm thinking $110K-$120K RMD (exact amount not important for this discussion) and we will be in a high 33% bracket. I plan to move the proceeds into SPY or equivalent in a brokerage account and pay required taxes from the proceeds.

For the sake of simplicity let's assume $120K RMD with 40K taxes (33% marginal rate) will this just be a simple matter of reducing 120K of SPY to 80K of SPY with new basis at RMD price? Simple thinking indicates 33% tax on 4% of the IRA with step-up on the remaining 2.67% (of the IRA) remaining after 1.33% tax (of the IRA) to the government.

I know these numbers change every year as I get older but visually is this a close estimate of reality or is there some flaw in my simplistic thinking here?

We are fortunate not to need these funds for our living expenses so the "M" in "RMD" is the watchword and very important.

IRA - $3M
1st year RMD $3M/26.5 - $118K ($120K for sake of rounding up)
1st year tax - $40K
1st year left - $80K

 

[pjm-7]

You should look into Qualified Charitable Distributions (QCD) from the IRA. You can start QCD's at age 70.5 and gift directly to a 501(c)(3) organization up to $100,000 per year. Your RMD starting age is 73, thus you can donate $300,000 (ages 70.5, 71 and 72) before starting RMD. If your RMD is $120,000 less $100,000 donation then your taxable portion is only $20,000. This might be a strategy if you charitably inclined. Also, the $100,000 is per individual, so if you and your wife have IRA's the amount donated can be up to $200,00.

 

[Route246]

We are definitely charitably inclined. So, it amounts to a few years prepaying and reaping the "credit" later in this scenario. It is definitely a good tax strategy. Will definitely start investigating this. Thank you very much.

You should look into Qualified Charitable Distributions (QCD) from the IRA. You can start QCD's at age 70.5 and gift directly to a 501(c)(3) organization up to $100,000 per year. Your RMD starting age is 73, thus you can donate $300,000 (ages 70.5, 71 and 72) before starting RMD. If your RMD is $120,000 less $100,000 donation then your taxable portion is only $20,000. This might be a strategy if you charitably inclined. Also, the $100,000 is per individual, so if you and your wife have IRA's the amount donated can be up to $200,00.

 

[Souschef]

+100 on QCD's. They are a great way to support charities, reduce your taxable income and decrease the amount of your IRA.
I have a marginal tax rate of 30% between state and federal taxes. If I do a QCD of $10K, it saves me $3K in taxes and reduces my IRA by $10K for next year's RMD.

 

[Koolau]

I knew I shouldn't have gotten rid of all my tIRAs.

 

[SecondCor521]

I'm not sure how you got 33% marginal rate.

$120K of RMD, minus the standard deduction of about $30K for MFJ where both are 65, leaves about $90K of taxable income. That fills up all of the 12% and spills a tiny bit into the 22% bracket.

Are you including state taxes? Those would generally apply to RMDs also, although several states provide various tax benefits on retiree income.

I guess you might also be thinking that the TCJA is expiring in 2026...?

 

[Souschef]

I'm not sure how you got 33% marginal rate.

$120K of RMD, minus the standard deduction of about $30K for MFJ where both are 65, leaves about $90K of taxable income. That fills up all of the 12% and spills a tiny bit into the 22% bracket.

Are you including state taxes? Those would generally apply to RMDs also, although several states provide various tax benefits on retiree income.

I guess you might also be thinking that the TCJA is expiring in 2026...?

OP lives in CA, so he must be adding in state tax. Figure 24% federal and 9% state gives you 33%.

 

[rk911]

You should look into Qualified Charitable Distributions (QCD) from the IRA. You can start QCD's at age 70.5 and gift directly to a 501(c)(3) organization up to $100,000 per year. Your RMD starting age is 73, thus you can donate $300,000 (ages 70.5, 71 and 72) before starting RMD. If your RMD is $120,000 less $100,000 donation then your taxable portion is only $20,000. This might be a strategy if you charitably inclined. Also, the $100,000 is per individual, so if you and your wife have IRA's the amount donated can be up to $200,00.

That's precisely what we did for 2023. The 200K will not appear as income on the tax return. Just be sure the charity is a 501c(3) organization.

 

[Sunset]

You should look into Qualified Charitable Distributions (QCD) from the IRA. You can start QCD's at age 70.5 and gift directly to a 501(c)(3) organization up to $100,000 per year. Your RMD starting age is 73, thus you can donate $300,000 (ages 70.5, 71 and 72) before starting RMD. If your RMD is $120,000 less $100,000 donation then your taxable portion is only $20,000. This might be a strategy if you charitably inclined. Also, the $100,000 is per individual, so if you and your wife have IRA's the amount donated can be up to $200,00.

We are definitely charitably inclined. So, it amounts to a few years prepaying and reaping the "credit" later in this scenario. It is definitely a good tax strategy. Will definitely start investigating this. Thank you very much.

I'm not sure that is what the poster meant.

I read it as yes, can donate prior to RMD.
The big tax benefit comes when doing RMD's as takes the place of the RMD up to $100K pp without increasing income.

Not a pre-paying option.

 

[Route246]

Sorry, not clear what I meant. By pre-paying I meant taking care of RMD before RMD start date.

I'm not sure that is what the poster meant.

I read it as yes, can donate prior to RMD.
The big tax benefit comes when doing RMD's as takes the place of the RMD up to $100K pp without increasing income.

Not a pre-paying option.

 

[pb4uski]

My wife and I are 66;65 now but I'm trying to do some early planning for RMD. All of our current pre-tax IRA/401-K assets are in SPY or equivalent. By the time RMD happens the 401-K will be rolled into the IRA. I'm projecting $3M give or take in the IRA once the consolidation happens so I'm thinking $110K-$120K RMD (exact amount not important for this discussion) and we will be in a high 33% bracket. I plan to move the proceeds into SPY or equivalent in a brokerage account and pay required taxes from the proceeds.

For the sake of simplicity let's assume $120K RMD with 40K taxes (33% marginal rate) will this just be a simple matter of reducing 120K of SPY to 80K of SPY with new basis at RMD price? Simple thinking indicates 33% tax on 4% of the IRA with step-up on the remaining 2.67% (of the IRA) remaining after 1.33% tax (of the IRA) to the government.

I know these numbers change every year as I get older but visually is this a close estimate of reality or is there some flaw in my simplistic thinking here?

We are fortunate not to need these funds for our living expenses so the "M" in "RMD" is the watchword and very important.

IRA - $3M
1st year RMD $3M/26.5 - $118K ($120K for sake of rounding up)
1st year tax - $40K
1st year left - $80K

Yes, I think you are on the right track. The government will force you to withdraw $120k and if you pay $40 in tax and then in the taxable account reinvest the $80k proceeds in SPY.

Easiset way is probably to sell $120k of SPY on day and then on settlement transfer $120k to taxable with $40k of federal withholding and then in taxable buy $80k of SPY.

Alternatively, you can just sell $40k of SPY in the IRA. The transfer 80k worth of SPY from IRA to taxable and separately transfer $40k out of IRA with 100% federal withholding.

 

[target2019]

Sorry, not clear what I meant. By pre-paying I meant taking care of RMD before RMD start date.

You can't "take care" of RMD before it happens. RMD is a requirement, so you take a withdrawal that satisfies the required RMD.

You can remove money before the RMD is required, but that is just called a withdrawal. That reduces your total balance, and you're taxed on the withdrawal.

Then there's QCD, as described by several here.

IRA is intended to *defer* taxes until RMD time hits.

 

[Sunset]

Sorry, not clear what I meant. By pre-paying I meant taking care of RMD before RMD start date.

I don't know if there is such a thing, ahead of RMD time.

Pre RMD time:

1. I know I can withdraw from IRA (which reduces future RMD's as the $$ is less)
   
2. Do a Roth conversion which also reduces future RMD's as the $$ is less.

 

[Route246]

I view RMD as a bother that needs to be dealt with when my age dictates. If my impending RMD is $100K in 2 years and I make a qualified $100K contribution 2 years prior to when RMD is required I consider this as prepaying for that bother, in other words it simplifies my life when the RMD date happens in terms of CPA billing time. I'm one of those who uses a CPA to handle my tax returns as I have AMT, capital gains, investments, partnerships, angel investments, options, etc. which require significant CPA fees (for me, at least) billed at an hourly rate. My CPA is a good friend from college and I am sure he appreciates the contribution I've made to his three daughters' college tuition (LOL) through 4+ decades as a client.

The thought of taking care of something early is really attractive, especially since charitable contributions will have more time to be ingested and used by the receiving organization.

Note: our RMD is otherwise not needed as SS and cash savings accounts are going to take care of our retirement living expenses so it will be used for charity or moved into a SPY-like mutual fund. In our case the university will receive the bulk of the benefit as I owe a great deal of credit for my career earning power to the education I received there.

I spoke with a high net worth friend (much higher net worth than us) and he views his retirement accounts as a king-sized bother and hassle as the few millions in his accounts are a very small percentage of his assets. I'm not in that class but fortunately our IRA/401K assets are not required to fund our retirement. If things went differently it would have been very important and I appreciate the fact that it was there just in case things turned out differently.

You can't "take care" of RMD before it happens. RMD is a requirement, so you take a withdrawal that satisfies the required RMD.

You can remove money before the RMD is required, but that is just called a withdrawal. That reduces your total balance, and you're taxed on the withdrawal.

Then there's QCD, as described by several here.

IRA is intended to *defer* taxes until RMD time hits.

 

[pb4uski]

Sorry, not clear what I meant. By pre-paying I meant taking care of RMD before RMD start date.

The only way you can do that is to drain the account before RMDs start since RMDs are based on the value of the account at the end of the previous year divided by the RMD factor for your age.

Every withdrawal before RMD age slighly reduces future RMDs since they also reduce the value in the tIRA.

 

[rk911]

You can't "take care" of RMD before it happens. RMD is a requirement, so you take a withdrawal that satisfies the required RMD.

You can remove money before the RMD is required, but that is just called a withdrawal. That reduces your total balance, and you're taxed on the withdrawal.

Then there's QCD, as described by several here.

IRA is intended to *defer* taxes until RMD time hits.

This ^^^^^