Wisdom of lump-sum distribution of 457 plan and IRAs?

[Runner]

I am pretty much a non-money person, meaning I really don't care about it.

I'm 70 years old; completely debt-free for many years; live on a state pension, my SS and my wife's SS, which adds up to about $90K annually; and have plenty of discretionary income.

I have about $380K in ultra-conservative investments - a Nationwide Fixed Account 457 plan ($170K), Series I savings bonds ($80K), and assorted bank CDs and savings accounts ($130K), some of which are traditional IRAs.

The total amount that will eventually subject to the MRD starting in 2022 is about $220K.

Just because I don't want to deal with the hassle or have my Russian wife deal with the hassle if I die, I'm thinking about taking a lump-sum distribution of the full $220K, paying the $40K or so in taxes, and being done with it. If I were to die, my wife would simply go home to her family, so I'd like her to be able to cash out quickly.

The other alternative would be to take the $220K over 3-4 years, but the tax consequences don't seem wildly different.

Any thoughts or bright ideas on this plan (or non-plan, as the case may be)?

[GrayHare]

Withdrawing as a lump sum maximizes the tax you will pay. If you don't care, that's the simplest way.

If you instead spread the withdrawals across years, you can likely halve that tax, and depending on deductions perhaps make it tax free, thus earning $40k for your effort.

You can begin small withdrawals now in order to further spread out the income.

[pb4uski]

If your health is good, I would suggest that you do Roth conversions on top of any RMDs rather than just a withdrawal. The impact is the same but the money ends up in a Roth IRA that grows tax free rather than a taxable account investment that is taxed each year.

I'm guessing that you could do $40-50k of withdrawals annually and stay within the 12% tax bracket so the taxes on that $220k would be more like $25-30k rather than $40k.

Another benefit of doing it over a number of years is that it would keep your income below the IRMAA first tier limit (currently $174k) so your Medicare Part B and Part D premiums avoid the higher surcharge that a higher income would result in.

If your health isn't so good, then taking it out over 2-3 years and keeping your income just below the IRMAA limit would be a good strategy.

[Runner]

Quote:

Originally Posted by pb4uski If your health is good, I would suggest that you do Roth conversions on top of any RMDs rather than just a withdrawal. The impact is the same but the money ends up in a Roth IRA that grows tax free rather than a taxable account investment that is taxed each year. I'm guessing that you could do $40-50k of withdrawals annually and stay within the 12% tax bracket so the taxes on that $220k would be more like $25-30k rather than $40k. Another benefit of doing it over a number of years is that it would keep your income below the IRMAA first tier limit (currently $174k) so your Medicare Part B and Part D premiums avoid the higher surcharge that a higher income would result in. If your health isn't so good, then taking it out over 2-3 years and keeping your income just below the IRMAA limit would be a good strategy.

Thanks - some good thoughts. My wife and I are both in ridiculously good health (and work very hard at it), but I also don't want my wife (who knows nothing about the U.S. financial system) to be caught off guard if I should suddenly be gone.

[pb4uski]

Do you have an idea of what your taxable income for 2020 will be without any Roth conversions? I think it would be your pension + 85% of SS + any RMD - the standard deduction ($27,400 for MFJ if both over 65).

You could convert the difference between that taxable income number and $80,250 and still be in the 12% tax bracket.... so any amount converted would only be taxed at 12%.