Should RMDs really scare you?

[DawgMan]

Despite all the calculators saying I am set for the long hall with a very conservative WR and relatively conservative AA (50/50 - 60/40), I find a constant desire, or perhaps feel it is my fiduciary responsibility to myself, to try and maximize my investment strategy year after year by tinkering with the mousetraps. Sure, most of the boring KISS methods would suffice, but I feel the need to turn the knobs perhaps more frequently than I should. So now, as I move into the withdrawal stage, my attention is drawn to how do I minimize my taxes and how much effort should I really put into massive Roth conversions today based on the hunch we will never see taxes this low again... but who is to say we don't over the next 30 or so years??.

So here is my pickle (and yes, everyone's situation is different)... my investments (and any SS I get at 70) will be the only resources to feed me and DW in retirement. My assets are split roughly 50/50 taxable and tax deferred. We are planning on a pretty fat withdrawal rate, which includes certain "constants" for taxes. After getting into the weeds with some calculators that take into account taxes, I have determined I can live off my taxable accounts just fine until RMDs hit (currently 56). Between return of capital/capital gains/interest, my taxes would be minimal until 72. If I take this approach, I get smacked in the face hitting the highest tax brackets for most of the RMD years, yet still, most of the calculators show me doubling my NW in the end. So, should I really care about RMDs? Maybe we have another President when I turn 72 who implements a similar tax policy like we have today? While legacy is not a big part of my plan, there will almost assuredly be a pot there for my kids in the end. I have looked at Roth conversions and/or strategic 401k withdrawals up to say the 24% bracket, but that sure looks less appealing short term compared to almost no taxes by pulling from my taxable accounts early on. At this point, I have somewhat settled on pulling a set amount annually from my 401K account up to a certain tax bracket threshold with the balance coming from taxable, but still wondering if I should really care about the looming RMD impact?

How much does the fear of RMDs affect your Roth conversions/401K withdrawal strategy?

Have any of you hit RMDs and having remorse for not taking a more aggressive approach before then?

 

[pb4uski]

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 but our income will only be lower by 1/3 of SS (which is much less than a tax bracket). As far as people's experiences, I think we've seen enough posts where people are getting nailed with big tax bills at rMD time to know the answer.

Assuming that if you do nothing and enjoy these years of no/low taxes then our RMDs will be taxed at a high rate because they are on top of your taxable account and SS income (or they will be at your heirs marginal tax rate).... so if you do no Roth conversions then you're squandering a great opportunity to move money from tIRA to Roth and from taxable to Roth at a low tax rate.

I didn't get where I am today by squandering opportunities to save on taxes and with the relatively high level of the national debt I think it more likely than not that tax rates are as low as they will ever get, no matter who is running the country.

 

[Time2]

Despite all the calculators saying I am set for the long hall with a very conservative WR and relatively conservative AA (50/50 - 60/40), I find a constant desire, or perhaps feel it is my fiduciary responsibility to myself, to try and maximize my investment strategy year after year by tinkering with the mousetraps. Sure, most of the boring KISS methods would suffice, but I feel the need to turn the knobs perhaps more frequently than I should. So now, as I move into the withdrawal stage, my attention is drawn to how do I minimize my taxes and how much effort should I really put into massive Roth conversions today based on the hunch we will never see taxes this low again... but who is to say we don't over the next 30 or so years??.

So here is my pickle (and yes, everyone's situation is different)... my investments (and any SS I get at 70) will be the only resources to feed me and DW in retirement. My assets are split roughly 50/50 taxable and tax deferred. We are planning on a pretty fat withdrawal rate, which includes certain "constants" for taxes. After getting into the weeds with some calculators that take into account taxes, I have determined I can live off my taxable accounts just fine until RMDs hit (currently 56). Between return of capital/capital gains/interest, my taxes would be minimal until 72. If I take this approach, I get smacked in the face hitting the highest tax brackets for most of the RMD years, yet still, most of the calculators show me doubling my NW in the end. So, should I really care about RMDs? Maybe we have another President when I turn 72 who implements a similar tax policy like we have today? While legacy is not a big part of my plan, there will almost assuredly be a pot there for my kids in the end. I have looked at Roth conversions and/or strategic 401k withdrawals up to say the 24% bracket, but that sure looks less appealing short term compared to almost no taxes by pulling from my taxable accounts early on. At this point, I have somewhat settled on pulling a set amount annually from my 401K account up to a certain tax bracket threshold with the balance coming from taxable, but still wondering if I should really care about the looming RMD impact?

How much does the fear of RMDs affect your Roth conversions/401K withdrawal strategy?

Have any of you hit RMDs and having remorse for not taking a more aggressive approach before then?

I'm getting a late start at 65yrs old, but yes, I have remorse for not have done some things sooner! I'm going to do my first Roth conversion this year, I expect it to be about $75k. The wife and I have about $1.1M in tax deferred accounts. If I can convert $400k in the next 7 yrs that would eliminate $14,598 of forced income, probably more if I assume it grows. I wish it was more, but my wife will have 4 more years to convert from her account, before her RMDs.
I wish I had understood the tax ramifications at an earlier age, most of not all of our tIRA deductions were in a low tax bracket. We should have just put it in a Roth and paid the taxes.
Tell me what calculators you have used.

 

[RetireBy90]

Sounds like you are a better saver than I was, but I am in a similar situation in that we could live very comfortably by just pulling the tinkering and pay whatever taxes they lay claim to when I turn 72. However I am trying to convert a significant portion of the tIRA to Roth before end of 2025 to minimize tax hit. If I were to pass before DW then she would pay a much higher effective tax even with the loss of my pension.

Were we to convert most before age 70 we would be in low end of 22% bracket in taxable income. Then my SS of about $3k would kick in and it would be taxed at 22% or higher. We could draw whatever we wanted or needed from Roth without a tax implication. Any remaining funds in tIRA could be donated to charity via QCD. This is my plan today.

If we didn't convert to Roth then we would be drawing the $3K SS and another $6K from RMDs, with the RMD increasing each year. This would mostly be taxed at 22-24% or whatever the rate is at that time. I certainly could do the QCD of $70K each year to bypass the RMD.

My point is that if I convert I'll pay 22% (plus state of 5.75% which is constant over $17K income) for another 5 to 8 years. After I get most converted I'll be back to a lower effective rate and 1) won't have so many moving pieces at tax time; 2) Won't have to worry about other impacts like IRMAA; 3) Makes life simpler and cheaper for surviving spouse; and 4) Provides more to pass to heirs or charity when done.

Certainly there are many inputs to making the best choice that we just don't know but for me even if I paid the same tax rates today or at 72 the additional benefits push me to convert aggressively. This decision for me is a mix of emotion and numbers so please don't think this is an answer for all.

 

[Midpack]

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 but our income will only be lower by 1/3 of SS (which is much less than a tax bracket). As far as people's experiences, I think we've seen enough posts where people are getting nailed with big tax bills at rMD time to know the answer.

Assuming that if you do nothing and enjoy these years of no/low taxes then our RMDs will be taxed at a high rate because they are on top of your taxable account and SS income (or they will be at your heirs marginal tax rate).... so if you do no Roth conversions then you're squandering a great opportunity to move money from tIRA to Roth and from taxable to Roth at a low tax rate.

I didn't get where I am today by squandering opportunities to save on taxes and with the relatively high level of the national debt I think it more likely than not that tax rates are as low as they will ever get, no matter who is running the country.

+1. I’ll save quite a bit in taxes converting to the top of the 22% bracket, but it won’t change my portfolio ending balance much. I’m converting for the future flexibility, as a hedge against the above, and a hedge against higher future tax rates that I expect. YMMV

 

[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 !

 

[pb4uski]

All first world problems that seem rather obsessive. ...

True, but the OP freely admits it.

Despite all the calculators saying I am set for the long hall with a very conservative WR and relatively conservative AA (50/50 - 60/40), I find a constant desire, or perhaps feel it is my fiduciary responsibility to myself, to try and maximize my investment strategy year after year by tinkering with the mousetraps. Sure, most of the boring KISS methods would suffice, but I feel the need to turn the knobs perhaps more frequently than I should. ...

 

[Midpack]

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 !

Obsessive? While I understand your point, first world problems, that doesn’t mean there’s anything wrong with taking steps to preserve your nest egg whatever it is. That’s how you accumulate a “seven figure” portfolio in part. And FI in the next 30 years probably/may not be anything like the last 30 like your parents (e.g. SS outlook, factory pensions aren’t as common). You can’t know if your plan will succeed until you go poof, better to plan accordingly.

 

[JoeWras]

Obsessive? While I understand your point, first world problems, that doesn’t mean there’s anything wrong with taking steps to preserve your nest egg whatever it is. That’s how you accumulate a “seven figure” portfolio in part - and FI in the next 30 years probably/may not be anything like the last 30 like your parents (e.g. SS outlook, factory pensions aren’t as common).

Right. There are plenty of public examples of people with 7 figure (or even 8 and 9!) portfolios that are not obsessive. Next thing you know they are complaining that they are out of money.

A little obsession in the right direction is a good thing.

 

[Souschef]

Being an engineer, I have the RMD calculations in a spreadsheet. I have entered the factors from the IRS website, and all I have to do is put in the year end balances, and it calculates the RMD.
I have redone the factors starting in 2021 based on the new IRS data

We do not need the money, thank goodness, so it is divided as follows:
Gifts to our 4 children
Gift to GD for nursing school tuition

Charitable donations (QCD)
Quarterly tax payments.

 

[Aerides]

Sure, take steps to minimize taxes, but no, nothing to be "scared" about. My parents like to grumble that the point of a 401k was they'd be in a lower income bracket when they had to take RMDs... but now because of a combo of SS and pensions, they are mostly in a higher bracket, and don't need to take anything out anyway.

But that is a nice problem to have. It's all just the deal we sign up for when we contribute to the plans to start with.

 

[sengsational]

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.



All that being said, I just did my 2020 taxes, twirled the conversion knob until I hit the ACA cliff, then backed off and called Fidelity to do an "in-kind" conversion. Just because it probably won't make too much difference doesn't mean it isn't a fun and satisfying pursuit

 

[audreyh1]

Our IRAs are still only about 20% of our investments so RMDs would not be a large amount that would be taxed at higher rates annually. Unfortunately our taxable income (mostly LT cap gains and qualified divs, but was also AMT until recently) has been way too high over the last several years to take advantage of opportunities. Instead I have been focusing on reducing our cap gains income by converting to more efficient funds as we can. It’s been slow, but definitely making progress.

In terms of the IRA beneficiaries we plan to have most or a large amount go to others than the surviving spouse. The other heirs are within 10 years of age to me, and are not in high tax brackets for the two that are more than 10 years younger than my husband, so it would not be a large burden to them, plus split by several individuals.

 

[gerntz]

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 but our income will only be lower by 1/3 of SS (which is much less than a tax bracket).

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.

 

[RunningBum]

How much does the fear of RMDs affect your Roth conversions/401K withdrawal strategy?

Fear? No. I'm just trying to optimize as best I can with the information I have. I think it would be foolish for me to pay $0 in taxes now, only to get hit later with RMDs putting me into a higher tax bracket, and making more of my SS taxable. For those who are married and faced with the possibility of one of you being taxed at the single rate if the other spouse dies early, it seems even more foolish to me.

I don't think it takes that much time to try to push your income close to the ACA edge or top of a tax bracket to get the most out of Roth conversions. I swear there are people here who put more effort into saving $10 or $20 on a tax program than saving themselves many, many thousands of $ with a conversion/RMD plan.

Personally I spend more than a little time on it, because I like to analyze things like this. I find it interesting as well as beneficial, so why not do it?

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 !

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.

 

[sengsational]

Re: leaving IRAs to a non-spouse, that seems like a good idea on the surface, anyway (haven't thought long about it). But even if the survivor "needed the money" it would almost certainly be gifted back (picturing my kids getting a windfall and my wife struggling...the kids would give it back)

 

[gerntz]

In terms of the IRA beneficiaries we plan to have most or a large amount go to others than the surviving spouse. The other heirs are within 10 years of age to me, and are not in high tax brackets for the two that are more than 10 years younger than my husband, so it would not be a large burden to them, plus split by several individuals.

That's the strategy I'm talking about also.

 

[gerntz]

Re: leaving IRAs to a non-spouse, that seems like a good idea on the surface, anyway (haven't thought long about it).

It's a better thought now with 10-year limit on payout period of tIRA by beneficiaries vs. old life expectancy payout period - normally much longer & thus lower payments/income.

 

[audreyh1]

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.

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.

 

[pb4uski]

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 think what you say makes sense since even in a higher tax bracket the surviving spouse will have more than they need... but in our case DD/DSIL are high earners and in a high tax bracket while DS is in a low tax bracket. I may consider doing beneficiary designations on an after tax basis... so DS would get more but in tIRAs and would pay a low tax on that money and DD would get less than DS but in Roths... haven't decided but the thought has crossed my mind.

 

[audreyh1]

Re: leaving IRAs to a non-spouse, that seems like a good idea on the surface, anyway (haven't thought long about it). But even if the survivor "needed the money" it would almost certainly be gifted back (picturing my kids getting a windfall and my wife struggling...the kids would give it back)

It’s a good option if one is convinced that the surviving spouse would not be underfunded, but rather overfunded.

The spouse also has the option of refusing the IRA inheritance in all or part I believe so that it would pass to the contingent beneficiaries.

Some have been concerned about non-spouse beneficiaries more than 10 years younger having to take the funds out within 10 years or otherwise paying higher taxes on IRA withdrawals. So it’s good to look at relative tax rates.

 

[Montecfo]

There is a lot we cannot know: Future tax rates, future investment returns, mortality, and especially tax brackets of heirs.

But if you simply make assumptions and put it into a spreadsheet some pat solutions come out.

I think I spent too much time during my career reviewing forecasts that were wildly off from what really happened to get too concerned with RMDs. High taxes in retirement are actually a good problem to have and one to which many would aspire.

But having said that I think doing some Roth conversions is a common sense thing to do.

 

[Andre1969]

I'll admit, I used to be afraid of RMDs, but I think it was drilled into my head by my family. I can remember when Grandmom hit 70.5, back in 1994. I would've been 24 at the time, and had little understanding of retirement accounts, IRA or otherwise, at the time. I just remember Grandmom complaining about it. And, my Mom tended to complain about it as well, even though she was years away.

But, once I started understanding the fact that you were getting the tax break when you put the money away, and it grew tax free, and only paid taxes when you took it out, it wasn't a bad thing. Obviously, the government is going to want their money at some point. Grandmom just got annoyed about being forced to take it out, because she didn't need it, and that's my Mom's complaint as well.

I did explain to my Mom, that if you don't need the money, just invest it in something else. Or even just save it for a rainy day.

In the past, I had planned to start taking IRA withdrawals at 59.5, since it's my hope that I'll be long since retired by then. I figured that if I started drawing down at 59.5, it'll lessen the impact when the RMDs start at 70.5 (or rather 72, now).

But, I just looked at the balance I have in IRAs (and my 401k). It's about $980K. I seem to recall the RMD for the first year, when it was 70.5, was something like 3.74%? I'm sure it's a bit different with backing it off to age 72, but not that different. So if I had to start withdrawing immediately, I'd have to pull out around $35-40K the first year.

I'm only 50, so I still have another 21-22 years to go before I hit RMDs. I'm sure the balance could easily double by then. So, once I'm retired, and don't have any more W2 income coming in, I might look into starting some Roth conversions.

 

[Midpack]

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.

An interesting idea I hadn't thought of, we might plan accordingly. Thanks.

 

[Sniggle]

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.