Should RMDs really scare you?

[Time2]

You are ignoring the benefit of deferring taxable income while you are in a higher tax bracket while working. If I was in the 39.6% bracket while working, and pay 22% withdrawing the retirement funds, I saved 17.6% over your method of paying 39.6% to invest that money in taxable and paying 0% when selling the fund. It's all about tax arbitrage.

Many companies matched at least some retirement savings contributions, a further benefits.

Also, if you have all your investments in taxable, you likely have a lot of dividends. That eats into your $80K space of 0% LTCGs. As a single, I have very little room for 0% LTCGs.

I never had to worry about the 39.6% tax bracket, I don't know that I ever got into more than the 15% bracket. So, I suspect it will work for lower income individuals, but not higher.

 

[sengsational]

When earnings are so significant, it overwhelms everything else and puts the RMD/Roth issue down in the weeds.

Good point. My models use historical rates rather than "conservative" rates because I don't think "it's different this time". And I never engage the asset allocation ramp (stays about 2/3 equities).

 

[RunningBum]

When earnings are so significant, it overwhelms everything else and puts the RMD/Roth issue down in the weeds. Let's hope we all have that problem. On this thread, some who have been doing conversions for many years now report this effect since their conversions can't even keep up with portfolio growth.

Most of us got here by being diligent about the little things. Lots of little things add up to a pretty good sized thing. Making coffee at home instead of buying it daily at Starbucks must also be in the weeds as far as personal economic impact goes, but I think most would consider it a good thing.

As far as earnings growth outpacing conversions, it's good to have the converted part now growing tax free.

 

[JoeWras]

Most of us got here by being diligent about the little things. Lots of little things add up to a pretty good sized thing. Making coffee at home instead of buying it daily at Starbucks must also be in the weeds as far as personal economic impact goes, but I think most would consider it a good thing.

I'm not arguing that. I think earlier "obsession" was used to address that viewpoint.

I'm still going to do it and hope it gets in the weeds. If we shoud have a decade of bad returns, it sure won't be in the weeds, so yeah, it matters.

Just pointing out that the defaults on i-orp are 7% gain. And that may be OK. Or not.

 

[gerntz]

Most of us got here by being diligent about the little things. Lots of little things add up to a pretty good sized thing. Making coffee at home instead of buying it daily at Starbucks must also be in the weeds as far as personal economic impact goes, but I think most would consider it a good thing.

I can make coffee with 2 minutes effort. Starbucks is at least 10 minutes. Starbucks is not worth 8 minutes of my life.

 

[RobbieB]

I started pulling my "first year" RMD amount from my IRA when I was 63. The IRA now has more dough in it than it did when I started pulling.

Just my way of dealing with reducing mandatory amounts, pull ahead of time.

Oh, and don't forget to Blow That Dough -

 

[CRLLS]

I started pulling my "first year" RMD amount from my IRA when I was 63. The IRA now has more dough in it than it did when I started pulling.

Just my way of dealing with reducing mandatory amounts, pull ahead of time.

Oh, and don't forget to Blow That Dough -

In our situation, trying to keep Roth conversion amounts below the ACA cliff and IRMAA triggers resulted in conversion amounts noticeably below the rate of growth. Like you, our tIRAs have more in them now than when we started Roth conversions.

I thought that the Roth conversions would be a hedge against filing as a single federal tax wise, should one of us pass significantly earlier than the other. I was surprised to see that I-Orp said "no difference". At least as far as spendable $ goes. FWIW, I was using 7% growth and 2% inflation assumptions with an 80/20 AA.

 

[audreyh1]

I started pulling my "first year" RMD amount from my IRA when I was 63. The IRA now has more dough in it than it did when I started pulling.

Just my way of dealing with reducing mandatory amounts, pull ahead of time.

Oh, and don't forget to Blow That Dough -

Yeah - funny how that happens!!!

But it's mostly due to a very long bull market that has even accelerated recently!

 

[Time2]

I can make coffee with 2 minutes effort. Starbucks is at least 10 minutes. Starbucks is not worth 8 minutes of my life.

I start my coffee and then go surf the net until I hear the final burbling when it is finishing. This morning my wife made a second pot, and like Pavlov's dogs I heard that burbling and reached for my cup, and walked out to the kitchen before I realized I'd already had my two cups. I didn't have any more.

 

[SecondCor521]

+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...

You can do this. Set up a trust, and leave the 401(k) to the trust by using your beneficiary designation. Mama can be the trustee, eldest kid can be the successor trustee when Mama passes.

The trust can have whatever rules it wants for distribution. The one I'm familiar with in real life has distribution of income and assets at the sole discretion of the trustee.

Do note that trusts have to pay income taxes at trust rates and brackets, which are worse than single rates. If income is distributed to beneficiaries of the trust, then the income can be reported on their return at their rates rather than the trust's rates, which can be a good thing or not depending on goals.

 

[gerntz]

You can do this. Set up a trust, and leave the 401(k) to the trust by using your beneficiary designation. Mama can be the trustee, eldest kid can be the successor trustee when Mama passes.

The trust can have whatever rules it wants for distribution. The one I'm familiar with in real life has distribution of income and assets at the sole discretion of the trustee.

Do note that trusts have to pay income taxes at trust rates and brackets, which are worse than single rates. If income is distributed to beneficiaries of the trust, then the income can be reported on their return at their rates rather than the trust's rates, which can be a good thing or not depending on goals.

I think that's a good way to go. Distributing income to be taxed at bennies rate is OK by me.

 

[DawgMan]

You can do this. Set up a trust, and leave the 401(k) to the trust by using your beneficiary designation. Mama can be the trustee, eldest kid can be the successor trustee when Mama passes.

The trust can have whatever rules it wants for distribution. The one I'm familiar with in real life has distribution of income and assets at the sole discretion of the trustee.

Do note that trusts have to pay income taxes at trust rates and brackets, which are worse than single rates. If income is distributed to beneficiaries of the trust, then the income can be reported on their return at their rates rather than the trust's rates, which can be a good thing or not depending on goals.

Ya, my head is starting to spin again. Part of me just says "pay the damn taxes!!" and stop obsessing with maximizing lifetime tax savings. If the plan works with or without conversions and with or without a single or married status, should I really really care?? Kids will still get a bucket of dough in the end, and if they have to pay taxes on an inherited IRA, let that be the worst thing that happens to them!

Ok, I fee better now. I am sure I will do something before the end of 2025.

 

[SecondCor521]

Ya, my head is starting to spin again. Part of me just says "pay the damn taxes!!" and stop obsessing with maximizing lifetime tax savings. If the plan works with or without conversions and with or without a single or married status, should I really really care?? Kids will still get a bucket of dough in the end, and if they have to pay taxes on an inherited IRA, let that be the worst thing that happens to them!

Ok, I fee better now. I am sure I will do something before the end of 2025.

If I may riff off your comment...

I've been obsessed myself for the past few years. All the math says I have anywhere between 3x and 10x what I will probably need or use.

So recently I had been operating on the premise that I could help my kids out more by piling up more cash for them. More is better, right?

Well, maybe not, I'm starting to think. First, when I kick, my kids will then have enough for the rest of their lives if they make responsible decisions and have decent luck. But if they're irresponsible, then they can probably burn through any amount I pass along.

So I am slowly shifting my focus from optimizing my Roth conversions over the next 34 years to trying to influence and educate my kids so that they can make good money choices. And have good lives, which is only tangentially related to having enough money, but having enough certainly can help in some ways.

I'm not trying to build a Rockefeller or Kennedy empire here. I'm just trying to avoid my kids blowing an opportunity by blowing an inheritance. I think that would make me sad (although I'll be dead if that happens to happen, so... :shrug: ).

 

[Time2]

Ya, my head is starting to spin again. Part of me just says "pay the damn taxes!!" and stop obsessing with maximizing lifetime tax savings. If the plan works with or without conversions and with or without a single or married status, should I really really care?? Kids will still get a bucket of dough in the end, and if they have to pay taxes on an inherited IRA, let that be the worst thing that happens to them!

Ok, I fee better now. I am sure I will do something before the end of 2025.

Yabut, I can easily live on income up to the top of the 12% bracket, and in 8 or 10 yrs when my portfolio has doubled and I receive SS and RMDs I'll be in the 22% or more probably the 24% bracket, and if tax brackets increase, I might be in the 28% bracket.

Then there is also the Filing single tax jump if one of us dies, but I'm liking the make the kids the beneficiary's idea.
OK, ya, my head is spinning too!

 

[DawgMan]

If I may riff off your comment...

I've been obsessed myself for the past few years. All the math says I have anywhere between 3x and 10x what I will probably need or use.

So recently I had been operating on the premise that I could help my kids out more by piling up more cash for them. More is better, right?

Well, maybe not, I'm starting to think. First, when I kick, my kids will then have enough for the rest of their lives if they make responsible decisions and have decent luck. But if they're irresponsible, then they can probably burn through any amount I pass along.

So I am slowly shifting my focus from optimizing my Roth conversions over the next 34 years to trying to influence and educate my kids so that they can make good money choices. And have good lives, which is only tangentially related to having enough money, but having enough certainly can help in some ways.

I'm not trying to build a Rockefeller or Kennedy empire here. I'm just trying to avoid my kids blowing an opportunity by blowing an inheritance. I think that would make me sad (although I'll be dead if that happens to happen, so... :shrug.

I hear ya. Not to get to far off the rails of this thread, my kids know DW and I are fine, but not the details as to how fine (I prefer it that way, at least for now). We have chosen to be strategic in our kid giving while we are still alive, trying to empower them to make certain decisions based on their own resources/means and then maybe quietly come in for a rescue. Eg. Two of my kids are shopping for baby hauling machines. No one has asked for $$ from pops and they are shopping based on their means, which I suspect will require car loans. Plans are to let them make their decision and then I will independently come in after words and say give them a $$ amount towards/or possibly pay off their car loans. The thought being if I come in on the front end and offer them dough, they may elect to supersize their decision as opposed to making the 'right" decision within their means. Plus, natural tendencies are then to start feeling a little entitled... in my opinion (it's new car time... dad always gives us $$ for new cars!). With 4 kids, I have to be sensitive to the score keeping... natural tendency.

I sort of seeing some of this approach playing out in real life with charity, in addition to the kids/grandkids, which will hopefully be part of my RMD tax avoidance strategy.

 

[explanade]

What are the fears about RMD, that they will cause you to pay too much taxes?

Or not be sufficient to pay for living expenses unless your IRA/401k do not have high enough balance to cover your RMD by the time you turn 70?

 

[RunningBum]

Ya, my head is starting to spin again. Part of me just says "pay the damn taxes!!" and stop obsessing with maximizing lifetime tax savings. If the plan works with or without conversions and with or without a single or married status, should I really really care?? Kids will still get a bucket of dough in the end, and if they have to pay taxes on an inherited IRA, let that be the worst thing that happens to them!

Ok, I fee better now. I am sure I will do something before the end of 2025.

Totally up to you. I can't be sure I have enough until it's all over. I'd rather pick who or which charities I'll leave money to than give it to the govt in extra taxes. But if it's giving you a headache to think about, don't. Just don't complain about higher taxes and IRMAA payments later. You can't complain that you didn't know.

Or you could just convert to some logical point like the top of a tax bracket, and be done. Easy enough, and you're likely converting the most beneficial part, and not analyzing to death the part that makes a smaller difference.

 

[DawgMan]

What are the fears about RMD, that they will cause you to pay too much taxes?

Or not be sufficient to pay for living expenses unless your IRA/401k do not have high enough balance to cover your RMD by the time you turn 70?

Perhaps fear was the wrong word. As previously mentioned, all the models show everything works dandy with or without Roth conversions. It's hard to break the old habits of trying to minimize taxes and maximize returns from my accumulation days.

 

[DawgMan]

Totally up to you. I can't be sure I have enough until it's all over. I'd rather pick who or which charities I'll leave money to than give it to the govt in extra taxes. But if it's giving you a headache to think about, don't. Just don't complain about higher taxes and IRMAA payments later. You can't complain that you didn't know.

Or you could just convert to some logical point like the top of a tax bracket, and be done. Easy enough, and you're likely converting the most beneficial part, and not analyzing to death the part that makes a smaller difference.

Not complaining, just wrestling out loud with the group regarding the pros/cons. I have been in the process of letting my business unwind, however, it is still producing income significantly above my spend which has me still in the mode of minimizing today's taxes. 2021 will probably see more than enough income to cover my spend as well, as I see it slowly move to a drip drip thereafter (maybe just shut the faucet off!), so it may not be until 2022 before I need to start a withdrawal. Any real Roth conversions will most likely not make sense until 2022, so I am just trying prepare to plan/plan to prepare for what's best.

No complaining here... I have 1st real problems, as we all do for the most part.

 

[audreyh1]

DH announced a new RMD strategy to me a couple of days ago during our road trip: He going to have all his RMD taken out as QCDs. He’s quite enthusiastic about it. Well that will certainly take care of the tax torpedo for a few years!

 

[SecondCor521]

DH announced a new RMD strategy to me a couple of days ago during our road trip: He going to have all his RMD taken out as QCDs. He’s quite enthusiastic about it. Well that will certainly take care of the tax torpedo for a few years!

I'm sure you know, but QCDs are limited to $100K per taxpayer per year. If your DH's RMD amount is below that, then he can do that strategy. If it's more than that, he's limited.

 

[pb4uski]

DH announced a new RMD strategy to me a couple of days ago during our road trip: He going to have all his RMD taken out as QCDs. He’s quite enthusiastic about it. Well that will certainly take care of the tax torpedo for a few years!

Given that RMDs are ~4% early on unless his tIRA is more than $2.5m that strategy should sink the tax torpedo... plus allow him to get the satisfaction of seeing his money go to a good cause and the accolades that go with it while he can enjoy it.

 

[harllee]

DH announced a new RMD strategy to me a couple of days ago during our road trip: He going to have all his RMD taken out as QCDs. He’s quite enthusiastic about it. Well that will certainly take care of the tax torpedo for a few years!

I don't know if I am going to use up all of my RMDs for QCDs but I plan to do a significant portion. DH and I already give a large portion of our income to charities--after age 70.5 (next year) I will just make all charitable gifts from my IRA. No tax torpedo for me.

 

[audreyh1]

I'm sure you know, but QCDs are limited to $100K per taxpayer per year. If your DH's RMD amount is below that, then he can do that strategy. If it's more than that, he's limited.

Yes, his RMDs won't be that high. At least not until he is much, much older. Knock on wood!

 

[gerntz]

DH announced a new RMD strategy to me a couple of days ago during our road trip: He going to have all his RMD taken out as QCDs. He’s quite enthusiastic about it. Well that will certainly take care of the tax torpedo for a few years!

One of my all-time favorite posts! OMG