Kitces : Strategies to reduce or delay RMD obligations

[walkinwood]

Kitces has a new blog post on strategies to reduce or delay RMD obligations.

https://www.kitces.com/blog/minimiz...ibution-rmd-mandatory-withdrawal-obligations/


I had a good laugh at the "still working" category. I'm sure it will be popular on this board

He lists a number of strategies and unfortunately, the only one that may benefit us is the use of a longevity annuity. But we have years to mull over that option.

 

[pb4uski]

I like the "Leveraging Joint Life Expectancy Tables With A Much-Younger Spouse" idea... I'll have to discuss it with DW.... of course, that might result in a whole host of other issues that might make the RMD problem moot.

 

[Big_Hitter]

i don't get the first example - "still working at 70.5"

really?

overall - really good summary of the options

 

[braumeister]

Excellent article. Thanks for the link.

 

[Winemaker]

I like the "Leveraging Joint Life Expectancy Tables With A Much-Younger Spouse" idea... I'll have to discuss it with DW.... of course, that might result in a whole host of other issues that might make the RMD problem moot.

If you survive.....

 

[pb4uski]

with my luck I would just be maimed.

 

[Hermit]

I am in the same boat as Betsy in Example 6 where he talks about doing partial Roth conversions. What he does not touch on is the interplay between income, taxes, and Medicare costs and the additional analysis needed to determine the best approach. If I bump up my income by doing Roth conversions that will mean I go into a higher income bracket for Medicare and will have to pay more into that bucket. The total out-of-pocket costs of money moving to the government are what is important to me. Whether I pay that additional money to taxes or Medicare seems immaterial to me.

 

[braumeister]

Yes, good point. Tax brackets and the Medicare MAGI brackets have to both be considered. I've been careful about that since missing the MAGI once and landing in a higher IRMAA category for a year. Now I have them both in my spending projections spreadsheet and they turn colors if they go over the limit.

 

[43210]

Kitces has a new blog post on strategies to reduce or delay RMD obligations.

https://www.kitces.com/blog/minimiz...ibution-rmd-mandatory-withdrawal-obligations/


I had a good laugh at the "still working" category. I'm sure it will be popular on this board

He lists a number of strategies and unfortunately, the only one that may benefit us is the use of a longevity annuity. But we have years to mull over that option.

Another link is mentioned
https://www.kitces.com/blog/using-s...ations-to-fill-the-lower-tax-bracket-buckets/
that expands on doing Roth conversions over time, and more on the effects of ACA subsidies (making "marginal rates" much higher) is here
https://www.kitces.com/blog/how-the...alth-insurance-impacts-the-marginal-tax-rate/

The thing that will block us from Roth conversions for most of our post-retirement pre-70.5 years is that for 9(?) years we will have kids in college, so we don't want the boost in income from Roth conversions (effectively the FAFSA calculation makes the "marginal rates" much higher, just like with ACA).

On the other hand we have zero pension and zero SS (and zero other income), so there's really no tax torpedo for us. Even if the Trad balance was sizeable (e.g. $2M), the RMDs would be in a low tax bracket like 15% (or maybe it'll be 12%). The only thing that can go wrong is if investment growth makes the balance keep growing, but that's hardly a problem.

But you do need a long term strategy, to both take advantage of low brackets to realize income, while avoiding that in high brackets (where "bracket" takes everything into account).

One more thing to consider is that your tax bracket can change from MFJ to single upon widowhood, which can put you in a higher bracket.

 

[donheff]

Whoa = what a site. You learn something new every day. I will probably have to consult an accountant to verify but it seems to me that DW may qualify to delay RMDs by 5 years. Maybe some of the more knowledgeable tax gurus here may know.

DW hasn't done a lick of work in 5 years BUT she is technically still employed. She is one of the last few attorneys at her firm who was grandfathered into an old partnership agreement that has since been changed. Under the agreement she is a "Special Partner" working under a 0-25% category that gives her $30K/yr COLAd (based on her earnings and years before she voluntarily changed from Equity Partner to Special Partner). In plain language she can do zero work and still receive the $30K. It is sort of like a stipend to be on the roles. She pays self employed Social Security and Medicare for this income. At age 75 she automatically switches over to "retired partner" under this plan and will receive 1/2 of the then amount of compensation as retired pay (no longer income). This is a big firm and DW already got her capital out so she doesn't have an ownership interest, much less 5%.

Sounds like she can postpone RMDs on the 401K funds in her work plan until age 75. That will entail a substantial tax savings for those few years. It also sounds tricky so we will need to be sure it applies. She is 65 so a few years away.

 

[audreyh1]

Kitces does fantastic work. I’m often reading articles from years ago refining strategies! I think he writes mainly for professional financial planners. I’m just so glad his blog is available for us DIY investors.

He also reigns in Pfau occasionally, by challenging his assumptions. Nice public service that.

 

[Which Roger]

If I or DW don't need the money, Qualified Charitable Distributions may be the way to go.

 

[Hermit]

If I or DW don't need the money, Qualified Charitable Distributions may be the way to go.

If charity was not already a known element in my overall financial plan, I would have to think long and hard about this as a major change to my overall financial plan.

My charitable contribution plan was put in place long before I decided that from a tax perspective it would make best sense to use QCDs to implement the plan. If not for that, I would probably limit QCDs to my normal giving level or perhaps an enhanced level of giving depending on where my stash was destined at my demise.

 

[Clone]

I like the "Leveraging Joint Life Expectancy Tables With A Much-Younger Spouse" idea... I'll have to discuss it with DW....

I recently suggested to the DW that we find someone significantly younger to help out 'around the house.' She assured me that anything she couldn't handle, I could handle myself!

I am clearly no longer able to hold public office of any kind...

 

[Texas Proud]

I am in the same boat as Betsy in Example 6 where he talks about doing partial Roth conversions. What he does not touch on is the interplay between income, taxes, and Medicare costs and the additional analysis needed to determine the best approach. If I bump up my income by doing Roth conversions that will mean I go into a higher income bracket for Medicare and will have to pay more into that bucket. The total out-of-pocket costs of money moving to the government are what is important to me. Whether I pay that additional money to taxes or Medicare seems immaterial to me.

That is the same thought I have with the ACA credit... I would rather keep the income low and get more credit now than convert and maybe save taxes in the future...

 

[Souschef]

If I or DW don't need the money, Qualified Charitable Distributions may be the way to go.

+1
I have been doing it for a while. My broker suggested a QLAC, but after researching it, the bottom line was i would be lucky to get my principal back at age 85. plus, as you get older, the RMD percentage goes up.

 

[Lsbcal]

Silly question, how to pronounce Kitces?

 

[Lsbcal]

...

I am clearly no longer able to hold public office of any kind...

Don’t worry, the standards for this are being lowered daily.

 

[Clone]

Does a Donor Advised Fund qualify as a Qualified Charitable Distribution?

https://www.vanguardcharitable.org/news/thinking-of-using-your-rmd-for-charitable-giving
https://www.fidelitycharitable.org/philanthropy/donating-retirement-assets-to-charity.shtml

Apparently this is not an option. It looks like you can donated directly from your IRA to 501(c)(3) organizations to meet your RMD requirements. So this may create an opportunity to use a DAF to bunch deductions prior to 70.5, then go directly from the account that requires RMDs after age 70.5.

Now to figure out is I can go direct from my inherited IRA (which has RMDs immediately) to a Qualified Charitable Deduction.

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds

Looks like that is a no-go. It looks like the path to go directly from an IRA to a QCD only exists after age 70.5.

 

[2017ish]

Silly question, how to pronounce Kitces?

I'm not good at this, but "kit_siz" with no hard accent on either syllable (maybe slightly on the second?). Listen at 12 second mark on this video:

 

[googily]

Silly question, how to pronounce Kitces?

I had a teacher who spelled it Kitzes and pronounced it KIT-zes. I assume his is KIT-ses.

I need to go read the article, because I have wondered if I should be taking chunks of the large six-figure IRA I inherited from DH (the rollover of his 401k) to lessen the size of it so that when my own 401k and IRAs arrive at RMD time, I don't have three very large pots needing to be RMD'ed when I'm 70.

 

[GTFan]

If I or DW don't need the money, Qualified Charitable Distributions may be the way to go.

Yup. Not leaving a big pile to the kids, so QCDs will do the trick for us if we don't need the money. I'm hoping at that point that the kids won't need it either, making it a no-brainer to me.

 

[googily]

I had a teacher who spelled it Kitzes and pronounced it KIT-zes. I assume his is KIT-ses.

I need to go read the article, because I have wondered if I should be taking chunks of the large six-figure IRA I inherited from DH (the rollover of his 401k) to lessen the size of it so that when my own 401k and IRAs arrive at RMD time, I don't have three very large pots needing to be RMD'ed when I'm 70.

Having now read it, I'm kind of like Example 6, though I'm only 51 and still working. And I'm not sure I would qualify for Roth conversions because of my salary, but will have to investigate. But if I have space in my tax bracket next year to take non-RMD distributions from the inherited IRA (which I can do as a spouse without penalty), I may do that, moving the money into my brokerage account or a Roth IRA if it's available to me.

 

[2017ish]

...And I'm not sure I would qualify for Roth conversions because of my salary, but will have to investigate. ...

There is no income cap on roth conversions, as opposed to contributions (hence, the "backdoor roth" option).

Basically a matter of comparing marginal tax rate now versus that likely in your future.

(We plan to be going to be doing lots of conversions--from DW's age 56 through her age 69--to the top of whatever the pertinent bracket may be.)

 

[googily]

There is no income cap on roth conversions, as opposed to contributions (hence, the "backdoor roth" option).

Basically a matter of comparing marginal tax rate now versus that likely in your future.

(We plan to be going to be doing lots of conversions--from DW's age 56 through her age 69--to the top of whatever the pertinent bracket may be.)

Ah, good to know. For some reason, my brain sees "Roth" and just seizes. Maybe because of the contribution limit. I'll start reading about conversions/back doors.

I plan to work full time for at least another year and then probably a few years of part-time after that, but who knows. It goes against what DH and I had planned, to keep working once we reached this level of savings, but right now it gives me something to do and gets me out of the house. A little structure while trying to get used to this new world.