Should RMDs really scare you?

[JoeWras]

Interesting discussion. I have wondered HOW MUCH there really is too gain by doing the conversions, but if it can be done relatively easily, and it can be used to goose the income up to the top of a bracket without going over, then it seems like a no brainer to at least do it on a small scale when you turn 59.5.

You can do it before 59.5. If you aren't working and have no other income, that's perhaps the best time to do Roth conversions, in very early retirement.

 

[RunningBum]

Interesting discussion. I have wondered HOW MUCH there really is too gain by doing the conversions, but if it can be done relatively easily, and it can be used to goose the income up to the top of a bracket without going over, then it seems like a no brainer to at least do it on a small scale when you turn 59.5.

Why wait until 59.5? Start when your income drops whenever you retire.

 

[MissMolly]

Certainly a valid approach. That’s our strategy. My IRA would go to non-spouse beneficiaries. At least half of DH’s larger IRA would go to non-spouse beneficiaries. For me beneficiaries are within the 10 year age limit so get lifelong drawdown schedule. For DH, 2 are more than 10 younger, but these folks are also approaching retirement ages and should be able to manage the 10 year deadline without too much tax pain and definitely paying lower tax rates than we would.

I thought nobody got the lifelong drawdown any longer (not counting spouses). I thought that starting with deaths in 2020 that everyone was on the 10-year drawdown schedule. Do I have that wrong?

 

[audreyh1]

I thought nobody got the lifelong drawdown any longer (not counting spouses). I thought that starting with deaths in 2020 that everyone was on the 10-year drawdown schedule. Do I have that wrong?

The old lifelong rules still apply if the beneficiary is not more than 10 years younger than the IRA account owner.

 

[Dtail]

Currently we have 84% TIRA/401k, 13% Taxable and 3% Roth.
We are converting some Roth for the DGF this year, but for me (as well as my brother), we are still minimizing our MAGI for the ACA, vs. larger scale Roth conversions. Savings of 23k in total in this category. Additionally the 401k has a great stable value account, so that will stay most likely until 72 y.o and makes up 33% of the TIRA/401k account.

The plan is to do Roth conversions at age 66 for me (lump sum pension at 65).
I will not be able to get most of the TIRA converted, but also took the original deductions at the 33/35% brackets and was not qualified for Roth contributions.
So all in all, it works out the best it can.

 

[pb4uski]

There is no magic to 59.5 since you can do Roth conversions at any age without penalty.. I suspect that you are thinking about withdrawals.

I think it is very situational. In our case, the savings are quite real from RE at 56 until I start collecting SS. During that time, absent any Roth conversions we would have $0 tax or be in the 10% tax bracket depending on what year we're talking about.

From 2013-2019, we converted $389k and paid $33k in federal tax on those conversions... an effective tax rate of 8.5%. As RMDs that money would be subject to 12% and 22%... probably ~16-18% based on my projections... so let's say 17%.

So by converting earlier I figure that I have saved $33k.... and a pretty easy way to save $33k. Now that SS is about to start for DW and will start for me in about 5 years, the pickings are slimmer, but I'll probably do substantial Roth conversions over the next 5 years, mostly so if one of us dies then the survivor won't be subject to much higher taxes.

Now for example, if you have a big pension and are already deep into the 22% tax bracket before Roth conversions then the opportunity is lesser because it is only 2% from 22% to 24% vs my 10% between 12% and 22%.

If one of us dies at 72 the survivor would lose DW's SS... that's it since my pension is 100% survivor. The standard deduction would halve so TI would go up some... about 7% by my calculations... but because of the different tax brackets between MFJ and single the tax would be 57% higher! Interestingly, the same 22% marginal tax bracket in each case but the survivor would be much deeper into the 22% tax bracket... in fact, almost to the top of the 22% tax bracket. That 57% jump in tax was eye-opening to me.

 

[jollystomper]

Not scared. I have done an initial analysis with various tools, and for my situation it looks like a wash. This is a "first world problem" as far as I am concerned. I am doing some, since our individual IRAs are relatively small enough that it does not impact our current tax bracket. But I have a large 401K, and even with conversions will have large RMDs.

After taxes are accounted for, I still will be getting back a lot more from my 401K than the salary I deferred into it.That is what really matters to me.

 

[Montecfo]

There is no magic to 59.5 since you can do Roth conversions at any age without penalty.. I suspect that you are thinking about withdrawals.

I think it is very situational. In our case, the savings are quite real from RE at 56 until I start collecting SS. During that time, absent any Roth conversions we would have $0 tax or be in the 10% tax bracket depending on what year we're talking about.

From 2013-2019, we converted $389k and paid $33k in federal tax on those conversions... an effective tax rate of 8.5%. As RMDs that money would be subject to 12% and 22%... probably ~16-18% based on my projections... so let's say 17%.

So by converting earlier I figure that I have saved $33k.... and a pretty easy way to save $33k. Now that SS is about to start for DW and will start for me in about 5 years, the pickings are slimmer, but I'll probably do substantial Roth conversions over the next 5 years, mostly so if one of us dies then the survivor won't be subject to much higher taxes.

Now for example, if you have a big pension and are already deep into the 22% tax bracket before Roth conversions then the opportunity is lesser because it is only 2% from 22% to 24% vs my 10% between 12% and 22%.

If one of us dies at 72 the survivor would lose DW's SS... that's it since my pension is 100% survivor. The standard deduction would halve so TI would go up some... about 7% by my calculations... but because of the different tax brackets between MFJ and single the tax would be 57% higher! Interestingly, the same 22% marginal tax bracket in each case but the survivor would be much deeper into the 22% tax bracket... in fact, almost to the top of the 22% tax bracket. That 57% jump in tax was eye-opening to me.

It is the most compelling reason to do Roth conversions in my view. Unlike future tax rates which could be higher, the same or lower, single rates are going to be much higher than married.

 

[SecondCor521]

The old lifelong rules still apply if the beneficiary is not more than 10 years younger than the IRA account owner.

Indeed. There are a number of other exceptions as well, including a disabled or very young beneficiary.

Why wait until 59.5? Start when your income drops whenever you retire.

Indeed. I did my first conversion at age 46 in the year that I FIREd. This has the added benefit of additional flexibility, since I'll have about 26 years to do conversions. Right now my plan is to convert to the top of a FAFSA limit while my kids are in college, then to the 400% FPL level until age 65, then to the 22% bracket until I'm 72 (then the 24% bracket thereafter).

I decided a few years back that it didn't make all that much difference doing it perfectly and doing it "wrong". I did that by running the numbers with and without conversions. I figure anyone who's worried about being in a high tax bracket after 75 is lucky indeed! Unless 75 is the new 35, and you don't ramp up your lifestyle, you'll probably have a hard time spending it all.

Strange. It may depend on one's specific numbers. In playing with my RMD / Roth conversion spreadsheet, I can easily get a difference of over $1M in net after tax spending over the 34 years in my plan depending on how much I convert and when.

While I very probably won't run out of money, that's enough for me to fiddle with to try to increase what my heirs would get.

 

[daveshow]

At 79 my parents were in the same situation. Now in their mid 80s, Mom needs expensive memory care which will drain their savings in less than 5 years if she lives that long. The Medicaid options are not good where they are at. And my father is dealing with cancer, and is reluctant to treat it because he thinks it will take money away from Mom's care, and he'd rather die than do that. It's no longer a first world problem. Most any one of us could face something similar. For most of us it would take more years, but why not do some basic planning to try to make it last a little longer.

I don't think my dad is being logical, as I don't think he's even been told how much this will cost and how much insurance will cover, but it's clearly wearing heavily on his mind and he's making it a factor in his treatment plan.

If you think it's not a problem worth concerning yourself about, don't. But don't tell others they are obsessing. That's not your damn business. Don't read these threads if it bothers you so much.

Good reason not to convert. Medical expenses including nursing home are income tax deductible for amounts over 7.5% of agi. You have to itemize to claim. Those deductions are at the top of your tax bracket.

 

[harllee]

DH and I are 69 and 70 so we are approaching RMD ages. We give a substantial amount of our income each year to charity. In a few months when DH reaches age 70.5 we will start giving all our charitable contributions from his IRA (QCD--up to a max of $100,000 per year, we will be under that). The QCD is subtracted from your RMD so we will have to take little or no RMD going forward.

 

[Dtail]

At 79 my parents were in the same situation. Now in their mid 80s, Mom needs expensive memory care which will drain their savings in less than 5 years if she lives that long. The Medicaid options are not good where they are at. And my father is dealing with cancer, and is reluctant to treat it because he thinks it will take money away from Mom's care, and he'd rather die than do that. It's no longer a first world problem. Most any one of us could face something similar. For most of us it would take more years, but why not do some basic planning to try to make it last a little longer.

I don't think my dad is being logical, as I don't think he's even been told how much this will cost and how much insurance will cover, but it's clearly wearing heavily on his mind and he's making it a factor in his treatment plan.

If you think it's not a problem worth concerning yourself about, don't. But don't tell others they are obsessing. That's not your damn business. Don't read these threads if it bothers you so much.

Good reason not to convert. Medical expenses including nursing home are income tax deductible for amounts over 7.5% of agi. You have to itemize to claim. Those deductions are at the top of your tax bracket.

Yeah it can be a big deal. Sorry to hear about your parents' situation.
Your mother's situation lends itself again to potential irrevocable trust medicaid planning for those that have decent medicaid options.

 

[2017ish]

Scare me... not really.... but if one of us should pre-decease the other then RMDs will be very expensive as our brackets will be single rather than MFJ ....

Yep. Scare is a strong word. I am cautious about the existence of RMDs when combined with what were fairly large and disproportionate T.I.R.A. holdings at time of retirement. So far, we've been drawing down our taxable accounts to live, while converting to the top of the 24% bracket. May go to top of 32% beginning in 2021, as we will start living solely on TIRA withdrawals and still would like to get a much closer balance between the two account types before January 1, 2026.

 

[DawgMan]

Jumping back into the fray... was out most of the day, but appreciate everyone's responses. Yes, 1st world problems.

While not perfect, I ran a few analysis on NewRetirement Planner Plus. While it's not perfect, is does use the current tax code and deductions (adjusts them annually by an inflationary factor I believe) and allows you to run some what if scenarios.

1) My Baseline Assumptions/Results

- Retirement withdrawals start age 56, 1/1/21, based on spending needs/wants/wishes
- RE accts split 50/50 after tax and 401K (no current Roth, all RE income from assets)
- SS starts age 70 (no pensions, other income)
- Steady annual expenses growing annually by inflation, all brokerage & 401k accts grow 5% year.
- Uses 100% after tax accts until RMDs hit, taxes stay very low (only State and capital gains) until 72 at which point RMDs have me consistently hitting 32% - 35%, +/- double NW at end of life. This would feel great until 72, but also feels like I am just kicking the can the road... kinda like or Fed government!

2) My Baseline Assumptions + 401K Withdrawals

- 15 years (thru age 71) of equal amount 401K withdrawals (represents +/- 56% of Yr 1 planned spend)
- Lifetime taxes drop 13% from Baseline
- Top tax bracket 22% until RMDs, then 24% until last 2 yrs of life when it hits 35%. This "feels" ok to me and solves part of the problem similar to Roth, but it appears it does not go quite as far?

3) My Baseline Assumptions + Annual Roth Conversions

- 15 years (thru age 71) of equal amount Roth Conversions (represents +/- 56% of Yr 1 planned spend, same amounts as used for 401K withdrawals)
- Lifetime taxes drop 17% from Baseline
- Top tax bracket 22% until RMDs, then 24% until last 2 yrs of life when it hits 35%. Ok, maybe...

4) My Baseline Assumptions + 3 Yrs Large Roth Conversions

- First 3 Yrs equal large Roth conversions, totaling the 15 yrs of Roth conversions noted above (I would have done 1 big Roth conversion, but calculator will not let you model a 7 figure conversion)
- Lifetime taxes drop 22% from Baseline
- Top tax bracket 37% first 3 yrs, then low (capital gains and state tax) until RMDs, then 24% until last 2 yrs of life when it hits 35%. This feels drastic, but wondering if swallowing the pill upfront helps avoid the slow bleed!

Of course a dollar today is worth more than a dollar in the future, so the savings in today's dollars on lifetime taxes is arguably less than the above.

I suppose I should give more thought to the surviving spouse tax hit as well. Ideas of maybe leaving partial tax differed accounts to kids another idea, but that also passes on a tax liability to them. Again, not complaining, just contemplating...

 

[audreyh1]

Good reason not to convert. Medical expenses including nursing home are income tax deductible for amounts over 7.5% of agi. You have to itemize to claim. Those deductions are at the top of your tax bracket.

Right- QCDs can reduce RMDs, and large medical expenses, including long term care, can reduce taxes.

 

[Sunset]

All first world problems that seem rather obsessive. My parents are both 79 and very active (and have been taking RMDs for 9 years now). They honestly don't know what to do with the extra money, and usually re-invest it.

These are people who had a one income factory pension, and one SS with only $100,000 in his 401K, possibly (just maybe) you are overthinking the fine details of your seven figure investments !

There are different perspectives in play.

Your parents have only a tiny savings.
With only $200,000 or less in a 401K , I wouldn't bother doing conversions.
If your parents have $2M in a 401K, RMD's would push them into higher tax brackets.

There is a sweet spot where this can be avoided by doing conversions. Thus saving money, which can be later used for LTC, or inheritance, or world cruise.

Also your Parents have a Pension, people who don't have a pension will depend on SS and savings, so not wasting money on taxes unnecessarily will make their retirement more financially secure.

 

[pb4uski]

DawgMan,

What are the results if from 56 until 72 you live off of taxable accounts (baseline) and add Roth conversions to the top of the 24% tax bracket? Same question but top of 22% tax bracket?

 

[Scratchy]

If one of us dies at 72 the survivor would lose DW's SS... that's it since my pension is 100% survivor. The standard deduction would halve so TI would go up some... about 7% by my calculations... but because of the different tax brackets between MFJ and single the tax would be 57% higher! Interestingly, the same 22% marginal tax bracket in each case but the survivor would be much deeper into the 22% tax bracket... in fact, almost to the top of the 22% tax bracket. That 57% jump in tax was eye-opening to me.

I've also been amazed at the "single" filing penalty compared with "MFJ" at RMD time. There's another thread running on prenups where some are suggesting there's little difference between living together and being married. As I mentioned on that thread, and as what you have written above illustrates, there are potentially very significant financial (tax and otherwise) benefits to being married, both while alive and for the survivor. Obviously, these should not be the deciding factors on whether to get married, but one should not be oblivious to them either.

 

[DawgMan]

DawgMan,

What are the results if from 56 until 72 you live off of taxable accounts (baseline) and add Roth conversions to the top of the 24% tax bracket? Same question but top of 22% tax bracket?

Well, good question. I can't say I have run a hard test tax return, just rough assumptions. I will give you more specifics, but I suspect I will get some "how can you spend that much $$" comments.

My scenario 3) was run doing $150K Roth conversions each year from 56 - 71, however, my taxable accounts are naturally producing $120K - $150K of fund capital gains/dividends (without any sales driven by my personal trades/rebalancing). My plan (so far) was to look at where I thought my taxable account dividends were totaling as I got to the end of a calendar year and then do either a strategic 401K withdrawal (or Roth conversion) to a tax threshold. At least that is the plan so far.

 

[CardsFan]

Well, good question. I can't say I have run a hard test tax return, just rough assumptions. I will give you more specifics, but I suspect I will get some "how can you spend that much $$" comments.

My scenario 3) was run doing $150K Roth conversions each year from 56 - 71, however, my taxable accounts are naturally producing $120K - $150K of fund capital gains/dividends (without any sales driven by my personal trades/rebalancing). My plan (so far) was to look at where I thought my taxable account dividends were totaling as I got to the end of a calendar year and then do either a strategic 401K withdrawal (or Roth conversion) to a tax threshold. At least that is the plan so far.

I think you fall into the can't lose and can't "win" category.

You apparently have the resources to live the retirement you want (WIN).

You probably have limited ability to minimized taxes in the future (lose?, not really).

I go back and forth on Roth conversions. For 3 years we have converted up to the 12% limit. This year I went into the 22% bracket, but below IRMAA. Bottom line: I cannot even keep up with the gains in my tIRA, even in the 22% bracket.

2 things are certain: Death and Taxes.

 

[audreyh1]

however, my taxable accounts are naturally producing $120K - $150K of fund capital gains/dividends (without any sales driven by my personal trades/rebalancing).

This is what I have been battling for several years. I’ve been exchanging funds that make high cap gains distributions for far more tax-efficient index funds during large market drops when realized gains are low. The situation is due to such a long bull market run. It wasn’t even on the radar before 2013. I have made progress, but still have some culprits.

 

[audreyh1]

I go back and forth on Roth conversions. For 3 years we have converted up to the 12% limit. This year I went into the 22% bracket, but below IRMAA. Bottom line: I cannot even keep up with the gains in my tIRA, even in the 22% bracket.

2 things are certain: Death and Taxes.

Yeah, that!

You are forced to go to low appreciation investments.

 

[2017ish]

... This year I went into the 22% bracket, but below IRMAA. Bottom line: I cannot even keep up with the gains in my tIRA, even in the 22% bracket.

2 things are certain: Death and Taxes.

Like what audreyh1 says, low appreciation assets can help--if they all go in the TIRA. We have Roths 100% equity, and all of our bonds/cash etc. in TIRA. "Unfortunately" (hah!) for the past three years, the equity gains in TIRA have still been equal to the amounts we've converted via maxing the 24% bracket. OTOH, the Roths have really taken off....

I guess the "good news" is that this effectively 12 year bull market will have to end for real at some point. That'll be the time to do conversions--not that we'll enjoy the situation.

 

[rk911]

scare me/us? no, but at this point (ages 70/69) they'll be upon us soon assuming no further changes in the law. i don't know what we'll do with them...maybe charity or gifts to my nephew and his wife, maybe re-invest, maybe a bit of all-of-the-above.

 

[audreyh1]

I guess the "good news" is that this effectively 12 year bull market will have to end for real at some point. That'll be the time to do conversions--not that we'll enjoy the situation.

Well yeah. All I need is a good bear market. But I really don’t want one!

One thing a bear market does is drastically reduce the cap gains distributions from mutual funds. I’ve kept records. After 2008 my cap distributions went to 0. Then very slowly crept up. It took several years to get back to pre-2008 levels. Similar after 2002, but not as drastic. These are the times to do your Roth conversions as well as take advantage of tax loss harvesting and exchange tax inefficient funds to more tax efficient funds.