Join Early Retirement Today
Reply
 
Thread Tools Display Modes
RMDs are they really something to worry about?
Old 08-20-2023, 01:08 PM   #1
Full time employment: Posting here.
2HOTinPHX's Avatar
 
Join Date: Mar 2015
Location: Somewhereville
Posts: 778
RMDs are they really something to worry about?

Interesting videos just posted on YouTube? Seems RMDs aren't the scary tax hit they are made out to be? Is he missing something? He shows the math....seems traditional 401K may be good way to go and RMDS aren't that big of a deal. Your thoughts appreciated.

https://youtu.be/LBmsYM7RxqA?si=isyLB1fqSJ2RkCNj
2HOTinPHX is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-20-2023, 01:17 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Jul 2011
Location: Reading, MA
Posts: 1,647
RMDs are overblown as a problem area.
$1M in tax-deferred is only $40k/year in RMD income, more or less.

But at some point in your working years, if it looks like you have plenty in tax-deferred, then put more in Roth accounts and after tax accounts.

In my case, I have three retirement income streams that contribute to my AGI: pension/annuity, SS, and RMD.
RMD is the smallest.

Actually, dividends and interest is the smallest, but I'm skipping that...
TheWizard is online now   Reply With Quote
Old 08-20-2023, 01:38 PM   #3
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 850
Whether they are or not will depend on each person's situation.

The video makes the first of the Common misconceptions described there: comparing marginal tax rates vs. effective tax rates.

That will make traditional look better than it is. Still might be better than Roth - again, it depends... - but not that much better.
SevenUp is offline   Reply With Quote
Old 08-20-2023, 01:46 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Sep 2014
Location: The Great Wide Open
Posts: 3,767
Well, as in all things retirement, everybody is different. While not everybody has $65k in pension income, $60k in SS, $20k in rental income, $10k in divvies and interest, and $100k in RMDs, some do. Once you hit $250k, then NIIT come in. Not to mention Tier 1 and 2 IRMAA penalties, and a higher Medicare premium. No, the effective tax rate looks small, but the add-ons increase that stealthily.

So, if one can reduce that number prior to taking SS and RMD's, it's a legal way to arrange one's affairs efficiently. Sometimes, the 6 figures I convert, in less than the 6 figures in gains, but some of us are trying to do something.
__________________
Give me Liberty or give me Death. Patrick Henry
Winemaker is offline   Reply With Quote
Old 08-20-2023, 01:46 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 5,613
We forecast out our RMDs before we started conversations and in our 80s it would have easily been six figures. It doesnít hurt much early in retirement, but can really bite you later on, especially if filing taxes as an individual. So we did some large conversions to get it under control to the point where anticipated charitable donations can be done with QCDs.
Dash man is offline   Reply With Quote
Old 08-20-2023, 01:51 PM   #6
Thinks s/he gets paid by the post
skyking1's Avatar
 
Join Date: Feb 2021
Location: Puget Sound
Posts: 3,183
^ that is my takeaway on RMD's too. DW has not much in deferred, but we will do what we can to convert to the top of the bracket, to help minimize tax for a surviving spouse.
There is no mitigating taxes from the pension income, but we will do what we can on the rest.
__________________
Class of 2023
OMY to 2024
Operating Engineer for a commercial plumbing contractor
skyking1 is offline   Reply With Quote
Old 08-20-2023, 01:52 PM   #7
Full time employment: Posting here.
 
Join Date: Aug 2013
Location: New Jersey
Posts: 865
I like the video. I like the last example where 80 year old Sally who is single, is paying $9175 in Federal taxes with an RMD of $49505 (1 million IRA) and AGI of $80000. The Federal taxes are still less than 1% of the amount in the IRA.
Al18 is offline   Reply With Quote
Old 08-20-2023, 02:00 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jul 2011
Location: Reading, MA
Posts: 1,647
I think it's wise during your working years to think of money you put into tax-deferred accounts as DEFERRED INCOME, meaning that much of that money needs to come back out and be taxed as ordinary income.

If at some point your priorities start to shift and you're looking more at generational wealth, then shift over to using mostly Roth and taxable accounts...
TheWizard is online now   Reply With Quote
Old 08-20-2023, 02:15 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jul 2011
Location: Reading, MA
Posts: 1,647
Also, you can start taking money out of tax deferred accounts at age 59-1/2, either as ordinary income or as Roth conversions.
Waiting until age 72+ when distributions from those accounts are REQUIRED is a mistake if you have a large balance...
TheWizard is online now   Reply With Quote
Old 08-20-2023, 02:19 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2003
Location: Florida's First Coast
Posts: 7,623
We are not overly worried about RMDs. We do not have that much in IRAs. $600k each respectively. DW is just 65 so 7 years to go for her at the current law, and I am 70 so 2 years for me. $600k x 4% is a mere $24k. I guess if we had $4m in deferred accounts it may be different. We do not take any withdrawals currently and at the current interest rates will not need to for the forseeable future.
__________________
"Never Argue With a Fool, Onlookers May Not Be Able To Tell the Difference." - Mark Twain
ShokWaveRider is online now   Reply With Quote
Old 08-20-2023, 02:28 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Location: Crownsville
Posts: 3,660
I just took a look. I have about $1.06M scattered between rollover IRAs and 401ks. I'm 53, and if I have my way I'm hoping to retire around my 55th birthday in April 2025. So, at this point I only have about a year and 8 months of additional contributions.

But, I believe I don't have to start taking RMDs until age 73, so that means they have another 18 years to compound. So, I guess it could amount to quite a handful by the time I have to start taking RMDs.

So, I've been thinking about doing some Roth conversions starting in 2025. Provided I do retire early enough in the year, that I don't have that big of an income for the year.
Andre1969 is online now   Reply With Quote
Old 08-20-2023, 02:34 PM   #12
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 850
Quote:
Originally Posted by Andre1969 View Post
So, I've been thinking about doing some Roth conversions starting in 2025. Provided I do retire early enough in the year, that I don't have that big of an income for the year.
Probably a good plan, although if you go on an ACA health insurance plan the conversions may be too expensive to justify.
SevenUp is offline   Reply With Quote
Old 08-20-2023, 02:35 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Car-Guy's Avatar
 
Join Date: Aug 2013
Location: Texas
Posts: 10,755
+ I was getting "more than" 100% tax deferred matching while I was socking it away in my 401k all those years. If I contributed 5%, my company would contribute/match 6%. From my POV it was taxed deferred free money. I remember some of the younger folks working for me would ask when they became eligible to participate in the plan, if I thought the companies 401k was a good deal.
__________________
Spending my time as wisely as I can, since I donít know what my time account balance is.
Car-Guy is offline   Reply With Quote
Old 08-20-2023, 02:37 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 17,152
Quote:
Originally Posted by Dash man View Post
We forecast out our RMDs before we started conversations and in our 80s it would have easily been six figures. It doesnít hurt much early in retirement, but can really bite you later on, especially if filing taxes as an individual. So we did some large conversions to get it under control to the point where anticipated charitable donations can be done with QCDs.

+1 My oldest sister is in her 80s and her RMD is growing fast..


In your mid 80s the divisor is like 16 or 17...



So, $1 mill div by 16 is $62,500.... at 72 it is about $36,500...
Texas Proud is offline   Reply With Quote
Old 08-20-2023, 02:41 PM   #15
Dryer sheet aficionado
Landolink's Avatar
 
Join Date: Jul 2021
Posts: 27
Plus have to consider state taxes. In Illinois you avoid taxes when you contribute and you donít pay taxes when you withdraw. Save 4.95%.
Landolink is offline   Reply With Quote
Old 08-20-2023, 05:04 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,062
Quote:
Originally Posted by TheWizard View Post
RMDs are overblown as a problem area.
$1M in tax-deferred is only $40k/year in RMD income, more or less....
No! RMDs are not overblown at all.

Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.

Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 08-20-2023, 05:20 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: NC
Posts: 21,091
Quote:
Originally Posted by pb4uski View Post
No! RMDs are not overblown at all.

Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.

Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.
+1. Add in Soc Sec and a lifetime ahead of dividends/STCG in taxable accounts and that additional $40K/yr pushes effective tax rates even higher! Like others have said, you have to actually do the math for your specific situation. RMDs may or may not be significant. The Roth conversions I’ve done are likely to save us about $400K in taxes over the next 29 years.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
Midpack is online now   Reply With Quote
Old 08-20-2023, 05:44 PM   #18
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 850
Quote:
Originally Posted by pb4uski View Post
Let's take an example of a married couple over 65yo with $20k of pension income and $50k of SS living in NY. Combined federal and state income tax is $123 or 0.23% of their income.
Is that all state tax? Federal and taxes are $0 using both the personal finance toolbox and IRS & State Tax Calculator. Appears the toolbox one applies a $20K pension subtraction so it gets $0 state tax also.

Quote:
Now add your $40k of RMDs that are no problem. Combined federal and state tax is now $10,128 or 9.21% of their total income.

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.
Agreed with the general idea that it's the (change in tax)/(change in income), whether one calls that "incremental", "marginal", "effective marginal", or whatever, that matters.

Similar issue with the $10,128: both tools linked above get ~$7,980 for federal tax, but it appears the toolbox assumes (perhaps optimistically, perhaps realistically) that the couple each has at least $20K each in subtractable pension and/or IRA income, so it gets only $158 for NY state tax instead of the $2150 the IRSCalc one gets.
SevenUp is offline   Reply With Quote
Old 08-20-2023, 05:59 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,062
I used https://www.irscalculators.com/tax-calculator

I get $158/0.23% for $20k pension and $50k SS (possibly I mistyped it).... $0 federal and $158 state.

Adding in $40k RMD is $10,128 in tax: $7,978 federal and $2,150 state.

Bottom line, the incremental tax on RMDs is a big deal.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 08-20-2023, 06:16 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Jul 2011
Location: Reading, MA
Posts: 1,647
Quote:
Originally Posted by Texas Proud View Post
+1 My oldest sister is in her 80s and her RMD is growing fast..


In your mid 80s the divisor is like 16 or 17...



So, $1 mill div by 16 is $62,500.... at 72 it is about $36,500...
The divisor is growing but the balance is often decreasing.
My RMD for 2023 is less than my RMD for 2022; how could that possibly be?
TheWizard is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Well, they fired me. Or they say they are going to. SAinMinn FIRE and Money 85 03-25-2022 10:20 PM
Should RMDs really scare you? DawgMan FIRE and Money 153 01-05-2021 12:11 PM
Why Don't Retirees Buy Annuities? They Get Something Most Economists Don't Tree-dweller FIRE and Money 101 12-05-2013 02:22 PM
Chinese A-sat Weapon? Something New To Worry About grumpy Other topics 10 01-18-2007 02:36 PM
ER'd from something or to something? RockMiner Life after FIRE 21 07-27-2005 08:37 PM

» Quick Links

 
All times are GMT -6. The time now is 08:10 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.