Should RMDs really scare you?

[Sunset]

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Originally Posted by ckelly78z 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]

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Originally Posted by pb4uski 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]

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Originally Posted by 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?

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]

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Originally Posted by DawgMan 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]

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Originally Posted by DawgMan 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]

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Originally Posted by CardsFan 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]

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Originally Posted by CardsFan ... 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]

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Originally Posted by 2017ish 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.

[USGrant1962]

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Originally Posted by gerntz I think there's high likelihood one of you will predecease the other. Which is why I don't understand one spouse leaving their tIRA to the survivor when the survivor has plenty to live on without the added tIRA funds & the increased RMD's drive them into higher tax brackets as you describe. Instead, go ahead and leave your IRA's, or at least part of them, to the ultimate beneficiaries directly (assuming their tax bracket will be lower). The added benefit of that is the beneficiaries won't have to empty the larger lumped together tIRA in the same 10 year period, offering the opportunity to keep tax rates down over a lengthier period. Then maybe I don't know what I'm talking about.

I'll second Midpack's comment - this is a real gem of an idea that had not occurred to me.

I always defaulted to the spouse as the beneficiary, not thinking about the actual needs or the tax hit from single filing. I really need to think about DW and I each leaving 1/2 of our tIRA/401(k) to each other and 1/4 to each son. In case of an unfortunate passing, like you said "the survivor has plenty to live on...", our boys could buy a house or pay down a mortgage, and Uncle Sam probably takes a little less. What's not to like?

These gems are why this forum is go great

[CRLLS]

We have been doing Roth conversions for the last 3 years in hopes of reducing the RMD's. I just went thru some what-if's in I-orp. If I understand correctly, the default condition is that I-Orp returns the allowable spending and increases it by the chosen inflation and growth amounts. What I found out is that if I make unlimited Roth conversions or none at all, the same allowable spending amount was returned. Even when I change the expected death of one of us, there is no difference between Roth conversion or none. There is a slight difference between us both living to the same age or not. I think/hope that it is only for our particular situation and not some error in I-orp.

Does this indicate that we should not be concerned about future Roth conversions?

Has anyone else done this what-if and found the same result? I already did our 2020 Roth. I'll have to look at it closer before doing the Roth for 2021.

[CardsFan]

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Originally Posted by CRLLS We have been doing Roth conversions for the last 3 years in hopes of reducing the RMD's. I just went thru some what-if's in I-orp. If I understand correctly, the default condition is that I-Orp returns the allowable spending and increases it by the chosen inflation and growth amounts. What I found out is that if I make unlimited Roth conversions or none at all, the same allowable spending amount was returned. Even when I change the expected death of one of us, there is no difference between Roth conversion or none. There is a slight difference between us both living to the same age or not. I think/hope that it is only for our particular situation and not some error in I-orp. Does this indicate that we should not be concerned about future Roth conversions? Has anyone else done this what-if and found the same result? I already did our 2020 Roth. I'll have to look at it closer before doing the Roth for 2021.

Two things:

1. The author of iORP had an article they wrote on the website a few years ago. Basically, he concluded that "optimal" conversions might add 2-4% to your Safe Withdrawal amount. I searched recently, and could not find the article, but I probably just missed it.

2. Based on the above, I ran through several scenarios for us. Low and behold, I found the same result.

That said, converting at low tax rates is a no brainer. Converting into the bracket you expect to be in can't hurt (except when you pay the tax bill)

The SECURE act threw in a monkey wrench for heirs with the 10 Year requirement for withdrawals, so we are primarily converting for future inheritance. But if DS and DDIL have to pay $500k on a $2,000k inheritance, so be it.

[Green Papaya]

Count me as one person who did not see the benefits of Roth IRA until it's too late. As a result, my after tax/ tax deferred money ratio is about 30/70. If I do no Roth conversion now, RDM will kick me into 24% marginal rate or higher. I have done spreadsheets for both no Roth conversion and Roth conversion up to 24% rate and there is not much difference 30 yrs out for me. To avoid the case if one of us predeceased, I am trying to convert now and stay fairly constant at 22% marginal rate. Whatever left at the end will be taxed at non-spouse beneficiaries tax rates.

[pb4uski]

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Originally Posted by CardsFan ....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. ...

Yeah, its sort of like a dog chasing its tail. We converted to the top of the 15%/12% tax brackets from 2013-2019... conversions equal to ~37% of the tax deferred balances when we retired in early 2012... and despite those conversions our tax-deferred balances today are 121% of what they were when we retired.

The saving grace is that our taxable/tax-deferred/tax-free when we retired was 44%/53%/3% and today is 15%/62%/22%.

[W2R]

I don't think RMDs should scare people if you can accept that you have no choice. It's just income! Income is good. So do your best tax planning, spend whatever small part of that income is required to pay the taxes on it, and then enjoy living off the rest.

Accept that the tax planning you did is your best, pay attention to the gurus that post here (I am terrible at this stuff, but we all know who the experts here are!) and don't beat yourself with a wet noodle if you missed something years ago.

OK, that's my philosophy anyway. I live off my RMDs, my SS, and my mini-pension and really don't spend much other than that. I don't feel bad about my RMDs and I welcome my equal monthly payments from the TSP to myself, which add up to a little more than my RMDs. My taxes are higher but so what, everything else is too these days (have you tried to buy TP lately? Even my property tax went up.).

I have enough "slop" in my budget to cover these expected increases. Life is good.

[DawgMan]

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Originally Posted by Green Papaya Count me as one person who did not see the benefits of Roth IRA until it's too late.

+1
Doing something for this reason may be the biggest motivator. The ideas of leaving a portion to the kids is an interesting idea, although, I would still want to make sure they managed the kitty in the event mama lives to 100 and needed more dough to live on. Question... is there a Trust vehicle (or other entity) I could say leave a 401K to that would help with this issue, but still keep the control with mama (so the kids don't run off and buy summer homes and boats!)? As I say this, I am assuming the Trust might have to pay single status taxes on RMDs as well. Just kicking rocks here...

[harllee]

So am I the only one planning to do a lot of charitable giving from my IRA next year when I reach age 70.5 thereby reducing my RMDs?

[DawgMan]

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Originally Posted by harllee So am I the only one planning to do a lot of charitable giving from my IRA next year when I reach age 70.5 thereby reducing my RMDs?

Can you actually give from your 401K without triggering a tax event first? I have always understood it is taxed first (unless your heirs inherit the 401K in which case they pay the taxes).

[foxfirev5]

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Originally Posted by 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.

After contributing and converting to Roths for years I believe we're done at age 65. IMHO we've reached a point where the risk of a RMD torpedo to a surviving spouse is balanced out by the possibility of excessive medical expenses at some point for one or both of us. Keeping a balance of taxable, tax deferred and tax free.