RMD and a SS Question

[Jerry1]

I’m 60 so I haven’t needed to research these things but I was eating with a friend and he’s 72 so RMD’s and SS came up mostly as it relates to how he was getting hosed on taxes. Anyway, it made me start thinking about these things and I figured I could get some answers here at our virtual coffee shop.

RMD’s - I understand that they are a percentage of your IRA and based on your life expectancy. Do they ever end? Or, does the formula force you to take out your entire IRA. Since my understanding is that it’s a percentage of your balance, it would seem like it would never take your IRA to zero.

SS - Doesn’t there come a time when your SS is no longer taxed? Makes sense that taking RMD’s would increase your income and thus make more of your SS taxable, but I though that ended at some point in your life. Does it?

In the end, I guess the question boils down to, once you’re 72, if your getting hosed on your taxes, is there ever really any relief? Or, does the tax man hang tight with you right to your end.

Note, we did discuss him still doing ROTH conversions, but that was mostly a discussion regarding whether or not he’d be moving into the next tax bracket, whether he thought tax rates would increase and I did make him aware of the tax implications of him or his spouse passing and the surviving spouse being taxed at single rates/brackets.

Another interesting thing was that he said that no one ever discussed RMD’s and their tax implications with him. He’s at Fidelity and I think he just used the free advisor that was provided due to our company 401K being administered by them. I found the same thing - they were all about how to set up investments but they didn’t have a clue on how to manage your tax deferred accounts in the most tax advantaged way when it came time to take withdrawals.

 

[Plantman]

The taxman is with you until you depart. RMD rate is 50 percent at age 120+.

 

[Car-Guy]

And it can be worse.... If your RMD's are high enough, SS will take more from your monthly checks to cover your additional Medicare/IRMAA premiums. But don't worry, it's all automatic once you file your taxes.... Nice to see the IRS, SS and Medicare all working together to take care of us.

 

[Sunset]

OP - It's called the tax torpedo, because of the sinking feeling once you realize the effect.

Many people, before RMD time, convert money to a Roth account while in a lower tax bracket (because no SS and if needed can take out less than RMD each year).

Remember RMD's are calculated on all IRA's as though they are one, and on any 401K separately.

We are doing IRA to Roth conversion, plus I'm taking out spending money from my IRA , both actions will reduce the tax torpedo effect a bit.

If you want a horror story, just figure out after RMD time, what the taxes will be for a surviving spouse.

This information is not widely explained, as the deduction of an IRA or 401K contribution is the "selling point" to get people to sign up.

 

[braumeister]

The taxman is with you until you depart. RMD rate is 50 percent at age 120+.

See? It really does end at some point. Once you're down to your last penny they can't realistically make you withdraw 50% of it so you're home free! Go ahead and blow that dough.

 

[RunningBum]

OP - It's called the tax torpedo, because of the sinking feeling once you realize the effect.

Yep. And there are some people, like a poster in a recent thread, who like the idea of paying low taxes for a few years. Probably is they'll get socked with the torpedo later and wonder what happened.

 

[ivinsfan]

Yep. And there are some people, like a poster in a recent thread, who like the idea of paying low taxes for a few years. Probably is they'll get socked with the torpedo later and wonder what happened.

Hosed is a relative term..the taxman says you can pay me now or you can pay me later....if you choose later this is what happens..

What we can do is keep an eye on our tax bracket and try to plan ahead a little. for example we've got some 20YO i bonds that we wanted to keep until maturity. A quick look yesterday tells me those puppies will throw off a minimum of 75K in taxable interest at maturity in 2031. So much for the 4.4 % yield and by 2031 we'll be doing RMD on both IRA's not just one. I was smart enough to buy them in small denominations, so I'll be getting out my tax tables and my calculator PDQ.

I'll be crying over the loss of yield but I brought it on myself...

 

[target2019]

Mom had SS, and some CDs. She paid no Federal taxes after my Dad passed. But I think most around here do not fit into that category.

What OP can do is fire up the tax program and create a return for a new profile. Add SS payments, no tax. Add Pension, you may still see no tax. But an IRA on top of that will likely add to taxes due. Since the IRA RMD and Pension don't stop until death (simplified case for example) you continue as easy pickens for the tax man.

 

[SecondCor521]

RMDs do not end unless the traditional IRA is completely empty. The required percentage increases every year.

Taxation of SS does not end unless your provisional income drops below the threshold amounts ($25K for singles, $32K for MFJ). Provisional income is essentially half your SS plus all your other income plus tax free interest.

Another aspect of the "single torpedo" is that if your spouse dies but your income remains the same, your IRMAA might increase because you're now facing IRMAA in the single brackets rather than the MFJ brackets.

Finally, don't forget that estate taxes and inheritance taxes might get you even after you die. And further, if you didn't drain your IRAs, your beneficiaries or heirs will typically have 10 years to drain them to zero.

...

And yup, in general there are very few good practitioners out there who can help optimize retirement tax and estate planning. Lots of practitioners, and many think they're experts, but not many actually are. And the ones that are very well could be expensive. (And it's hard to tell if they're worth it, because they seem to know more than me. How do I know if they're telling me straight or its just bunk?)

 

[audreyh1]

Tax torpedo - well named! As in a sudden blow up that recurs annually

 

[volfan]

Sunset, you are so right about the surviving spouse and taxes. And the IRMMA kicks in at about $88k for the surviving spouse. So along with the much higher taxes they will also pay more for Medicare. And we aren’t talking about people with a 6 figure income!

 

[mickeyd]

Or, does the tax man hang tight with you right to your end.

Not only that, but Uncle Sam will demand taxes from your IRA etc. that is left to your kids. Yes, he will reach into your casket and demand payment.

 

[marko]

OTOH, there are some like myself, who's current IRA withdrawals/living expenses exceed whatever their RMD will be...I'm already doing my 'RMD' amount!

I've never done the math, but wonder what my portfolio would be like if I hadn't deferred the tax and had had to pay taxes on all that growth over the past 40 years or so. Just guessing but I suspect I'd have a lot less than I do now, even with having to pay current taxes.

 

[VanWinkle]

I did the math on conversions to eliminate RMDs and the cost of conversion over 4 years was about 110,000 in taxes. I also checked the tax hit at RMD time and it was around 5500 a year. I would have to live almost 20 more years to come out ahead...... Instead, I am doing some smaller conversions just to reduce RMDs a little.

All of this is based on todays rates, so that is the unknown factor in the equation.

 

[Souschef]

One thing I have done is transfer the asset in the amount of the RMD to a taxable account. The basis becomes the value at transfer. Also if it becomes inherited, it gets a stepped up basis.

 

[RunningBum]

I did the math on conversions to eliminate RMDs and the cost of conversion over 4 years was about 110,000 in taxes. I also checked the tax hit at RMD time and it was around 5500 a year. I would have to live almost 20 more years to come out ahead...... Instead, I am doing some smaller conversions just to reduce RMDs a little.

All of this is based on todays rates, so that is the unknown factor in the equation.

If I did no more conversions until 72, a lot of my RMD would be in the SS tax hump, causing a net 49.95% tax. I'm not going to bother doing the full math to see how much, but it's enough to know it's real.


Instead I'm trying to convert it all down at a 12% income tax rate over the next 11 years. In the next 6 years it'd be a 22% net tax because of a ~10% ACA subsidy loss due to the added MAGI.

 

[Time2]

If I did no more conversions until 72, a lot of my RMD would be in the SS tax hump, causing a net 49.95% tax. I'm not going to bother doing the full math to see how much, but it's enough to know it's real.


Instead I'm trying to convert it all down at a 12% income tax rate over the next 11 years. In the next 6 years it'd be a 22% net tax because of a ~10% ACA subsidy loss due to the added MAGI.

This bogles me. I didn't know there was 49.95% bracket. If you had $5M in tax deferred accounts the first year RMD would be $183,500. If you got $50,000 in SS that would be $232,500. That puts you in the 35% bracket if single and 24% bracket if MFJ.
What am I missing?

 

[harllee]

Don't forget you can make charitable gifts from your IRA that reduce your RMD (up to a max of $100,000 per year). I plan to do this when I am required to take RMDs, that will reduce the tax bit substantially.

 

[Montecfo]

There is really very little I can do to minimize taxes later. The room I have for Roth conversions makes little dent in the tax deferred.

Also do not want to convert a bunch just in time for a potential large market decline.

High quality problem I know. Hopefully it will only get worse.

 

[RunningBum]

This bogles me. I didn't know there was 49.95% bracket. If you had $5M in tax deferred accounts the first year RMD would be $183,500. If you got $50,000 in SS that would be $232,500. That puts you in the 35% bracket if single and 24% bracket if MFJ.
What am I missing?

It's not a bracket, it's a rate where you have a certain amount of regular income (like tIRA withdrawals/RMDs), social security, and qualified dividends. Another $100 IRA withdrawal taxed at 12% pushes another $85 of SS into being taxed at 12%, and $185 more Qdivs into a 15% tax

That's $12+$10.20+$27.75=$49.95.

Kitces describes this in example 5 in https://www.kitces.com/blog/long-te...one-higher-marginal-tax-rate-phase-in-0-rate/ .

https://www.bogleheads.org/wiki/Social_Security_tax_impact_calculator also shows it graphically.

Edited to add: A lot of people won't hit this. For example if you already have the max SS taxed, any extra tIRA withdrawal has no more SS to push into being taxed. And the range of income where this happens isn't that wide.

 

[walkinwood]

Like many here, I have fixated on SWR using my fixed percentage withdrawal backed up with tools like Firecalc. Since they don't take the tax situation into account, I could face a much lower after tax amount in later years.



I think it is time (for me at 61, at least) to consider the more sophisticated tools like Income Strategy or MaxFi. A lot of posters have recommended iOrp and I should give it another shot.

 

[qwerty3656]

I'm stuck between needing low income for ACA purposes and wanting to max out current tax bracket for future RMD purposes

 

[Exchme]

Like many here, I have fixated on SWR using my fixed percentage withdrawal backed up with tools like Firecalc. Since they don't take the tax situation into account, I could face a much lower after tax amount in later years.



I think it is time (for me at 61, at least) to consider the more sophisticated tools like Income Strategy or MaxFi. A lot of posters have recommended iOrp and I should give it another shot.

Firecalc is great for the FI/not FI decision, but like any tool it has its limits and you are right, it doesn't know anything about taxes. So if you have a big chunk of your assets in tax deferred, you should reduce the amount of assets you tell it by whatever you guess your tax rate might be. Most people that are on the edge of FI probably won't really be out of the 12% bracket by much, so it's not a huge difference and it may be that steady Roth conversions can get you back in line.

When you go to I-orp.com, be sure to scroll down to find the clickable word Extended. The Extended version has a lot more power than the one at the top of the page. I-orp does things opposite of everything else in that you give it your assets, SS, pension, income, life expectancy and it tells you how much money you can spend. If you don't want to spend that much, you then guess at the surplus and let it recalculate. Its tax package has some simplifications on IRMAA and some things like AMT, NIIT, deduction phaseouts that I don't believe it addresses, but overall it's quite easy to use and gives interesting results. Remember it is an optimizer, so if doing an extra $100,000 in Roth conversions would net even $1 extra, it will do it, even though your human judgment might say that was not a good idea. That's just a trade-off you make vs having to figure out everything manually.

 

[Montecfo]

Firecalc is great for the FI/not FI decision, but like any tool it has its limits and you are right, it doesn't know anything about taxes. So if you have a big chunk of your assets in tax deferred, you should reduce the amount of assets you tell it by whatever you guess your tax rate might be. Most people that are on the edge of FI probably won't really be out of the 12% bracket by much, so it's not a huge difference and it may be that steady Roth conversions can get you back in line.

When you go to I-orp.com, be sure to scroll down to find the clickable word Extended. The Extended version has a lot more power than the one at the top of the page. I-orp does things opposite of everything else in that you give it your assets, SS, pension, income, life expectancy and it tells you how much money you can spend. If you don't want to spend that much, you then guess at the surplus and let it recalculate. Its tax package has some simplifications on IRMAA and some things like AMT, NIIT, deduction phaseouts that I don't believe it addresses, but overall it's quite easy to use and gives interesting results. Remember it is an optimizer, so if doing an extra $100,000 in Roth conversions would net even $1 extra, it will do it, even though your human judgment might say that was not a good idea. That's just a trade-off you make vs having to figure out everything manually.

Or simply budget taxes as part of your spending. It is an expense.

 

[TheWizard]

That Tax Torpedo thing is mainly for people who don't plan ahead financially.
I'm single and collecting SS now but starting RMDs in either 2022 or 2023, depending.

I've been doing Roth conversions since I retired in 2013.
The amount I'm converting this year, for example, will be roughly what my RMD will be in 2022 or 23.
Hence my AGI will change very little once I transition into RMD-land and quit doing Roth conversions.

I call this strategy Levelizing my AGI...