Taxes in retirement: What a difference an RMD makes!

[W2R]

Quote:

Originally Posted by freebird5825 I was just going to ask that question...RMDs only apply to traditional IRAs, correct? I only have a Roth IRA. Whew.

RMD's won't apply to your Roth, but WILL apply to your TSP if you have any money in there.

[Gotadimple]

Quote:

Originally Posted by ScottFromUtah So, how does rolling over to Roths help? I'm 65 and RMD kick in at age 71, right? Should I start doing something now?

If you can afford to pay the taxes on Roth rollovers over the next few years, you are then putting assets in your Roth that can grow tax-free until you withdraw them.

As Ziggy stated, distributions from a Roth are currently not counted as income towards determining how much of your Social Security is taxable.

By moving as much as you can afford to from a Traditional IRA to a Roth, you reduce the balance of the Traditional IRA at age 70-1/2, when you have to take a minimum distribution. If you have a large balance in a Traditional, then, your RMD will be significantly large. Traditional IRA distributions could put you in a higher tax bracket, AND, will be counted towards how much of your social security is taxed.

-- Rita

[FIRE'd@51]

This is another situation in which taking SS early and repaying after you turn 70.5 may help fight off the tax on one, or maybe even two, RMD's, since the repayment can be deducted on Schedule A. Conversely, delaying SS until 70 can actually exacerbate the effect Ziggy writes about. In addition, you have to pay attention to the possibility of the RMD triggering the extra means-tested Medicare Part B premiums, especially if filing as a single.

[Alan]

Quote:

Originally Posted by ScottFromUtah So, how does rolling over to Roths help? I'm 65 and RMD kick in at age 71, right? Should I start doing something now?

Probably.

I have a friend who just turned 70 & 1/2 and has to take RMD's this year from his T-IRA's and it is much more money that he wants to take so he asked me if he could roll it over to a Roth as he he realizes he doesn't need any of it and probably wants to pass all the IRA money to his 2 sons when he dies.

Unfortunately, you cannot roll an RMD into a Roth. But he can if he wishes, start rolling over T-IRA money to Roth's over and above his RMD's so he is going to start doing his conversions over the next few years.

[rescueme]

Quote:

Originally Posted by Gotadimple What I mean by this is that one should, if possible, reduce the amount of Traditional IRA funds before required minimum distribution age.

Yes, that's also why I'm delaying my SS till age 70 (DW till age 66) in order to do a "draw down" on tax deferred funds, which would require us to increase our withdrawls (and taxes) of "excess" RMD's after 70.5...

[ScottFromUtah]

Quote:

Originally Posted by Alan Probably. I have a friend who just turned 70 & 1/2 and has to take RMD's this year from his T-IRA's and it is much more money that he wants to take so he asked me if he could roll it over to a Roth as he he realizes he doesn't need any of it and probably wants to pass all the IRA money to his 2 sons when he dies. Unfortunately, you cannot roll an RMD into a Roth. But he can if he wishes, start rolling over T-IRA money to Roth's over and above his RMD's so he is going to start doing his conversions over the next few years.

Thanks for the excellent explanation. Maybe I need to get some professional help on this, but right now my taxes are high because I'm receiving large royalties on textbooks written before retiring. Now DW and I are not writing any more (or as much), those royalties will drop significantly over the next six years, just in time (probably) for the RMD to increase the tax burden, and just at the time (probably) that I will need money from my T-IRA. Is there an online calculator that can help me work this out, or should I hire a financial planner? (I haven't had good experience with financial planners.)

[Alan]

Quote:

Originally Posted by ScottFromUtah Thanks for the excellent explanation. Maybe I need to get some professional help on this, but right now my taxes are high because I'm receiving large royalties on textbooks written before retiring. Now DW and I are not writing any more (or as much), those royalties will drop significantly over the next six years, just in time (probably) for the RMD to increase the tax burden, and just at the time (probably) that I will need money from my T-IRA. Is there an online calculator that can help me work this out, or should I hire a financial planner? (I haven't had good experience with financial planners.)

Your RMD is fixed by age.

This is one of many calculators available

Required Minimum Distribution Calculator

e.g. put in age 71 and IRA value of $1M and the RMD is $37.7K

How it affects your taxes is very much going to depend on your individual situation.

I am just starting this year to roll my T-IRA money to Roth and I use TurboTax to put in possible sums to roll over and see how it affects my taxes. The idea is to roll over enough to utilize the lower tax band(s).

[scrinch]

Quote:

Originally Posted by ScottFromUtah So, how does rolling over to Roths help? I'm 65 and RMD kick in at age 71, right? Should I start doing something now?

Come on, it all makes perfect sense. In order to avoid having to pay much in taxes when you have to take money out of your T-IRA later, take the money out and pay taxes on it now. Got it?

No seriously, the thought behind this is managing when you pay taxes to take advantage of a low current marginal rate. If you have a lower tax rate now than you think you'll have in your 70's, it may make sense to begin converting. If you now are in a relatively high bracket, probably doesn't make sense. But as you can tell from many of these posts, there can be a lot of details to consider before you reach the "right" decision for you.

[ziggy29]

Quote:

Originally Posted by scrinch Come on, it all makes perfect sense. In order to avoid having to pay much in taxes when you have to take money out of your T-IRA later, take the money out and pay taxes on it now. Got it?

Given the potential added tax impact of taxation of SS benefits, as I discovered, it can make a lot of sense to pay the tax now to use a Roth even if you think tax rates may be higher later.

[unclemick]

I play with the ORP calculator which attempts to take tax code into it's recommended distributions. Single, 66, 16th year of ER.

I don't always understand the results - but it is 'interesting.'

Having had a number of female 'friends' over the years - also do not always follow the best numbers - speaking cheap SOB wise.

heh heh heh - of course I would never admit to 'my' personal urges to splurge adult toy wise. .

[ScottFromUtah]

Quote:

Originally Posted by Alan Your RMD is fixed by age. This is one of many calculators available Required Minimum Distribution Calculator e.g. put in age 71 and IRA value of $1M and the RMD is $37.7K How it affects your taxes is very much going to depend on your individual situation. I am just starting this year to roll my T-IRA money to Roth and I use TurboTax to put in possible sums to roll over and see how it affects my taxes. The idea is to roll over enough to utilize the lower tax band(s).

Great stuff! Thanks for the information and the suggestion. I now know what to do! (Well, I know what to do to get started on making a decision as to what to do.)