Should RMDs really scare you?

[USGrant1962]

I think there's high likelihood one of you will predecease the other.

Which is why I don't understand one spouse leaving their tIRA to the survivor when the survivor has plenty to live on without the added tIRA funds & the increased RMD's drive them into higher tax brackets as you describe.

Instead, go ahead and leave your IRA's, or at least part of them, to the ultimate beneficiaries directly (assuming their tax bracket will be lower). The added benefit of that is the beneficiaries won't have to empty the larger lumped together tIRA in the same 10 year period, offering the opportunity to keep tax rates down over a lengthier period.

Then maybe I don't know what I'm talking about.

I'll second Midpack's comment - this is a real gem of an idea that had not occurred to me.

I always defaulted to the spouse as the beneficiary, not thinking about the actual needs or the tax hit from single filing. I really need to think about DW and I each leaving 1/2 of our tIRA/401(k) to each other and 1/4 to each son. In case of an unfortunate passing, like you said "the survivor has plenty to live on...", our boys could buy a house or pay down a mortgage, and Uncle Sam probably takes a little less. What's not to like?

These gems are why this forum is go great

 

[CRLLS]

We have been doing Roth conversions for the last 3 years in hopes of reducing the RMD's. I just went thru some what-if's in I-orp. If I understand correctly, the default condition is that I-Orp returns the allowable spending and increases it by the chosen inflation and growth amounts. What I found out is that if I make unlimited Roth conversions or none at all, the same allowable spending amount was returned. Even when I change the expected death of one of us, there is no difference between Roth conversion or none. There is a slight difference between us both living to the same age or not. I think/hope that it is only for our particular situation and not some error in I-orp.

Does this indicate that we should not be concerned about future Roth conversions?

Has anyone else done this what-if and found the same result? I already did our 2020 Roth. I'll have to look at it closer before doing the Roth for 2021.

 

[CardsFan]

We have been doing Roth conversions for the last 3 years in hopes of reducing the RMD's. I just went thru some what-if's in I-orp. If I understand correctly, the default condition is that I-Orp returns the allowable spending and increases it by the chosen inflation and growth amounts. What I found out is that if I make unlimited Roth conversions or none at all, the same allowable spending amount was returned. Even when I change the expected death of one of us, there is no difference between Roth conversion or none. There is a slight difference between us both living to the same age or not. I think/hope that it is only for our particular situation and not some error in I-orp.

Does this indicate that we should not be concerned about future Roth conversions?

Has anyone else done this what-if and found the same result? I already did our 2020 Roth. I'll have to look at it closer before doing the Roth for 2021.

Two things:

1. The author of iORP had an article they wrote on the website a few years ago. Basically, he concluded that "optimal" conversions might add 2-4% to your Safe Withdrawal amount. I searched recently, and could not find the article, but I probably just missed it.

2. Based on the above, I ran through several scenarios for us. Low and behold, I found the same result.

That said, converting at low tax rates is a no brainer. Converting into the bracket you expect to be in can't hurt (except when you pay the tax bill)

The SECURE act threw in a monkey wrench for heirs with the 10 Year requirement for withdrawals, so we are primarily converting for future inheritance. But if DS and DDIL have to pay $500k on a $2,000k inheritance, so be it.

 

[Green Papaya]

Count me as one person who did not see the benefits of Roth IRA until it's too late. As a result, my after tax/ tax deferred money ratio is about 30/70. If I do no Roth conversion now, RDM will kick me into 24% marginal rate or higher. I have done spreadsheets for both no Roth conversion and Roth conversion up to 24% rate and there is not much difference 30 yrs out for me. To avoid the case if one of us predeceased, I am trying to convert now and stay fairly constant at 22% marginal rate. Whatever left at the end will be taxed at non-spouse beneficiaries tax rates.

 

[pb4uski]

....For 3 years we have converted up to the 12% limit. This year I went into the 22% bracket, but below IRMAA. Bottom line: I cannot even keep up with the gains in my tIRA, even in the 22% bracket. ...

Yeah, its sort of like a dog chasing its tail. We converted to the top of the 15%/12% tax brackets from 2013-2019... conversions equal to ~37% of the tax deferred balances when we retired in early 2012... and despite those conversions our tax-deferred balances today are 121% of what they were when we retired.

The saving grace is that our taxable/tax-deferred/tax-free when we retired was 44%/53%/3% and today is 15%/62%/22%.

 

[W2R]

I don't think RMDs should scare people if you can accept that you have no choice. It's just income! Income is good. So do your best tax planning, spend whatever small part of that income is required to pay the taxes on it, and then enjoy living off the rest.

Accept that the tax planning you did is your best, pay attention to the gurus that post here (I am terrible at this stuff, but we all know who the experts here are!) and don't beat yourself with a wet noodle if you missed something years ago.

OK, that's my philosophy anyway. I live off my RMDs, my SS, and my mini-pension and really don't spend much other than that. I don't feel bad about my RMDs and I welcome my equal monthly payments from the TSP to myself, which add up to a little more than my RMDs. My taxes are higher but so what, everything else is too these days (have you tried to buy TP lately? Even my property tax went up.).

I have enough "slop" in my budget to cover these expected increases. Life is good.

 

[DawgMan]

Count me as one person who did not see the benefits of Roth IRA until it's too late.

+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...

 

[harllee]

So am I the only one planning to do a lot of charitable giving from my IRA next year when I reach age 70.5 thereby reducing my RMDs?

 

[DawgMan]

So am I the only one planning to do a lot of charitable giving from my IRA next year when I reach age 70.5 thereby reducing my RMDs?

Can you actually give from your 401K without triggering a tax event first? I have always understood it is taxed first (unless your heirs inherit the 401K in which case they pay the taxes).

 

[foxfirev5]

At 79 my parents were in the same situation. Now in their mid 80s, Mom needs expensive memory care which will drain their savings in less than 5 years if she lives that long. The Medicaid options are not good where they are at. And my father is dealing with cancer, and is reluctant to treat it because he thinks it will take money away from Mom's care, and he'd rather die than do that. It's no longer a first world problem. Most any one of us could face something similar. For most of us it would take more years, but why not do some basic planning to try to make it last a little longer.

I don't think my dad is being logical, as I don't think he's even been told how much this will cost and how much insurance will cover, but it's clearly wearing heavily on his mind and he's making it a factor in his treatment plan.

If you think it's not a problem worth concerning yourself about, don't. But don't tell others they are obsessing. That's not your damn business. Don't read these threads if it bothers you so much.

Good reason not to convert. Medical expenses including nursing home are income tax deductible for amounts over 7.5% of agi. You have to itemize to claim. Those deductions are at the top of your tax bracket.

After contributing and converting to Roths for years I believe we're done at age 65. IMHO we've reached a point where the risk of a RMD torpedo to a surviving spouse is balanced out by the possibility of excessive medical expenses at some point for one or both of us. Keeping a balance of taxable, tax deferred and tax free.

 

[audreyh1]

So am I the only one planning to do a lot of charitable giving from my IRA next year when I reach age 70.5 thereby reducing my RMDs?

QCDs only apply as part of an RMD. You can’t gift ahead or over AFAIK.

ETA: OK - I see that there is an exception and you can start QCDs when you reach age 70.5 even though RMDs don’t start until the year you reach 72.
https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics

 

[DawgMan]

QCDs only apply as part of an RMD. You can’t gift ahead or over AFAIK.

Do I understand this correctly. By example, if my RMD w/o setting up a QCD at say age 72 is $500K, then I pay taxes on the $500K. If I set up a $100K QCD, then I pay taxes on $400K? In both cases, $500K comes out of my account.

If you are planning to give every year, why would you not do something like this? As I understand it, you must be 70 1/2 before you can set this up. Is there any other vehicle like this to gift out of your tax deferred accounts prior to age 70 1/2 to help offset RMDs?

 

[audreyh1]

Do I understand this correctly. By example, if my RMD w/o setting up a QCD at say age 72 is $500K, then I pay taxes on the $500K. If I set up a $100K QCD, then I pay taxes on $400K? In both cases, $500K comes out of my account.

If you are planning to give every year, why would you not do something like this? As I understand it, you must be 70 1/2 before you can set this up. Is there any other vehicle like this to gift out of your tax deferred accounts prior to age 70 1/2 to help offset RMDs?

That sounds right.

Don’t know other vehicles to gift from IRAs without having it fully taxed as income and have to itemize to get a charitable deduction.

 

[pb4uski]

Yes that is my understanding... if money goes directly from your tIRA to a charity then it counts towards your RMD but is not taxed... as if withdrawn, contributed and deductible with no limitation. I just wish they would allow QCDs at an earlier age.

 

[DawgMan]

Yes that is my understanding... if money goes directly from your tIRA to a charity then it counts towards your RMD but is not taxed... as if withdrawn, contributed and deductible with no limitation. I just wish they would allow QCDs at an earlier age.

Just thinking about this further, does a QCD really end up being more beneficial than an itemized charitable deduction? Using my example, if you itemized $100k would you not deduct it and get to the same place?

 

[audreyh1]

Just thinking about this further, does a QCD really end up being more beneficial than an itemized charitable deduction? Using my example, if you itemized $100k would you not deduct it and get to the same place?

Yes, QCDs are considered more beneficial than itemizing charitable deductions.

1. Itemizing deductions doesn’t reduce MAGI, whereas a QCD does by reducing the IRA withdrawal declared as income. MAGI impacts things like IRMAA.
2. Itemized deductions are often limited in some way for high income households.
3. Using a QCD lets you use the standard deduction as well as fully remove the QCD from AGI.

 

[RunningBum]

Yes, QCDs are considered more beneficial than itemizing charitable deductions.

1. Itemizing deductions doesn’t reduce MAGI, whereas a QCD does by reducing the IRA withdrawal declared as income. MAGI impacts things like IRMAA.
2. Itemized deductions are often limited in some way for high income households.
3. Using a QCD lets you use the standard deduction as well as fully remove the QCD from AGI.

All true. Plus any part of the charitable expense needed to push you over the standard deduction does not really count. For example, say you had $10K in other deductions, had $15K in charitable giving, and the standard deduction is $24K. Your itemized deduction would be $25K, just $1K better than the standard deduction, so you really only got $1K of that $15K of charitable giving deducted.

One advantage to non-QCD charitable giving is that you can use appreciated assets. I found that very simple to do with a DAF.

 

[RetireBy90]

So am I the only one planning to do a lot of charitable giving from my IRA next year when I reach age 70.5 thereby reducing my RMDs?

That is my plan. I'll convert what I can before RMDs but plan to do QCD for RMD from what is left after conversions. Then when we get planted about 50% of remainder should go to charities. I believe a well managed charity can be more effective than govt in addressing problems and I can also favor one need over others.

 

[gerntz]

One advantage to non-QCD charitable giving is that you can use appreciated assets. I found that very simple to do with a DAF.

But,
- Those appreciated assets are taxed at normally lower cap gains rates than the income tax rates for assets coming out of tIRA's. Also, in my state, cap rates are the same as income tax rates whereas QCD's avoid those also.
- Even those cap gains taxes go away when you die.

Net, the way tax laws are now, I think QCD's are the better deal. Avoiding cap gains taxes are still a deal.

 

[Time2]

Just food for thought, If you had never opened a Tax deferred account and had it all taxable, first you would not have RMDs, and you could with draw
up to $80k of LTCGs at 0% tax. So say that after 30 years of saving, you have an average LTCG of 60%. Example" $1,000,000 Networth, of which $400,000 is money you put in and $600,000 is LTCGs. You could withdraw $133,333, of which $80,000 is LTCGs taxed at 0%. If you can live on $80k, then you reinvest $53,333 back into the fund, this lowers your LTCGs percentage. It probably even gets better if you add in the standard deduction.

Do I have this right?


I'll add, we could not have known that some LTCGs would be taxed at 0% 30 years ago, and we don't know if they will be taxed at 0% 30 years from now.

 

[RunningBum]

But,
- Those appreciated assets are taxed at normally lower cap gains rates than the income tax rates for assets coming out of tIRA's. Also, in my state, cap rates are the same as income tax rates whereas QCD's avoid those also.
- Even those cap gains taxes go away when you die.

Net, the way tax laws are now, I think QCD's are the better deal. Avoiding cap gains taxes are still a deal.

You get a double benefit from donating appreciated assets, IF you are already itemizing deductions. It doesn't matter than the cap gains rate is lower than regular income because this is an additional benefit.

If I donate $10K of a stock that has appreciated from $5K, that's $5K I won't pay in caps gains. At 15%, that's $750.

Additionally, I increase my itemized deduction by the full $10K, so my taxable income is reduced by $10K. This is similar to the income reduction of QCDs, though it doesn't reduce MAGI like QCDs do.

The $750 is an additional benefit gained by gifting appreciated stock rather than cash.

It's true that your heirs get a stepped up basis if you die with appreciated stock, but that could change.

 

[pb4uski]

Just food for thought, If you had never opened a Tax deferred account and had it all taxable, first you would not have RMDs, and you could with draw
up to $80k of LTCGs at 0% tax. So say that after 30 years of saving, you have an average LTCG of 60%. Example" $1,000,000 Networth, of which $400,000 is money you put in and $600,000 is LTCGs. You could withdraw $133,333, of which $80,000 is LTCGs taxed at 0%. If you can live on $80k, then you reinvest $53,333 back into the fund, this lowers your LTCGs percentage. It probably even gets better if you add in the standard deduction.

Do I have this right?


I'll add, we could not have known that some LTCGs would be taxed at 0% 30 years ago, and we don't know if they will be taxed at 0% 30 years from now.

Yes, you have it right.... but 1) we didn't know that 0% LTCG would be a thing when we deferred many years ago and 2) a pension and/or SS will reduce the room that you have for 0% LTCG.

 

[RunningBum]

Just food for thought, If you had never opened a Tax deferred account and had it all taxable, first you would not have RMDs, and you could with draw
up to $80k of LTCGs at 0% tax. So say that after 30 years of saving, you have an average LTCG of 60%. Example" $1,000,000 Networth, of which $400,000 is money you put in and $600,000 is LTCGs. You could withdraw $133,333, of which $80,000 is LTCGs taxed at 0%. If you can live on $80k, then you reinvest $53,333 back into the fund, this lowers your LTCGs percentage. It probably even gets better if you add in the standard deduction.

Do I have this right?


I'll add, we could not have known that some LTCGs would be taxed at 0% 30 years ago, and we don't know if they will be taxed at 0% 30 years from now.

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.

 

[sengsational]

I'll second Midpack's comment - this is a real gem of an idea that had not occurred to me.

Just when you think you have it figured out and would be bored by yet another Roth conversion discussion... hehehe!

What I found out is that if I make unlimited Roth conversions or none at all, the same allowable spending amount was returned.

It was a while back, but I ran a parallel set of models and confirmed that i-orp was doing what I expected. Conversions made a difference, but not earth shattering.

That is my plan. I'll convert what I can before RMDs but plan to do QCD for RMD from what is left after conversions. Then when we get planted about 50% of remainder should go to charities. I believe a well managed charity can be more effective than govt in addressing problems and I can also favor one need over others.

Just thinking about this further, does a QCD really end up being more beneficial than an itemized charitable deduction? Using my example, if you itemized $100k would you not deduct it and get to the same place?

Not to get too far afield, but for those who are giving, I just read "Doing Good, Better" and it changed how I think about what causes were "best". Of course it's a personal decision, but the concepts presented got me thinking differently about how to make the biggest difference.

 

[JoeWras]

After reading here, I was playing with i-orp a bit. If you ratchet down the earnings component of your portfolio, and/or force it into a more conservative allocation, you start seeing more differences if you choose the different Roth conversion pulldowns. I think earnings defaults to 7%. You can change this if you go to the advanced screens.

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.

One thing to note, though, is the effect of passing on an inherited Roth to your younger beneficiaries. This was discussed above, and for some people may be an important driver of doing aggressive conversions.