Should RMDs really scare you?

[CRLLS]

What you said is correct as far as it goes. If you take out $500K, and you are in the 22% bracket, you will pay $110K in taxes on it.
If you do a QCD for $100K you pay taxes in $400K, at 22% bracket, your tax will be $88K, saving you $22K in taxes.
Also, the higher the tax bracket, the more the savings.

Wouldn't that 100K be normally taxed at the 32% or 35% tax bracket? I am assuming the top end of the $400K would force that tax bracket. If so, the tax savings would be much greater than $22K.

 

[Souschef]

Wouldn't that 100K be normally taxed at the 32% or 35% tax bracket? I am assuming the top end of the $400K would force that tax bracket. If so, the tax savings would be much greater than $22K.

That is correct. Frankly, I was too lazy to look up the higher brackets. At 35% the savings would be $35K

 

[explanade]

You save money on taxes but you gave away $100k to get a large charitable deduction?

 

[SecondCor521]

You save money on taxes but you gave away $100k to get a large charitable deduction?

Right. QCDs are only useful if you were going to give the money away anyways.

They are useful because the $100K gets excluded from AGI and thus does not impact any other AGI-dependent tax things (like IRMAA). I'm fairly certain that QCDs are also not subject to any limitations that might otherwise be imposed on Schedule A, such as Pease limitations and percent of AGI limitations for charitable contributions.

(ETA: Technically you don't even get a deduction; you just get to exclude it from AGI, which is sort of the same thing but not exactly, due to the above.)

 

[audreyh1]

Exclusion from AGI is super useful. It means that it doesn’t count towards NIIT or AMT as well as lowering regular taxes. Schedule A itemized deductions help with regular taxes and the charitable portion reduces AMT, but doesn’t help with NIIT, as well as being subject to various limitations.

But yeah, unless charitable gifting was already a priority, QCDs wouldn’t make sense. It’s just the best way to do gifting tax-wise with the possible exception of highly appreciated securities. The latter is still subject to certain limitations on Schedule A.

Also donation of highly appreciated securities has a benefit where they can be contributed to a DAF, where QCDs cannot. That’s more of a convenience thing.

 

[harllee]

You save money on taxes but you gave away $100k to get a large charitable deduction?

True--if you are not charitably inclined then you probably would not want to do the charitable gift from the IRA just to save the taxes. It makes sense for me because I give a sizable amount to charity anyway. In fact I have made some additional pledges to charitable causes that are important to me with the caveat they have to wait until we are age 70.5 to receive them out of our IRAs. Supporting charities is an important part of our lives.

 

[audreyh1]

DH sees it as how much more we can give the charity if we do it as a QCD.

 

[misanman]

if my RMD w/o setting up a QCD

Minor point - I don't think in terms of "setting up a QCD". You just make a QCD. My experience is with Fidelity but I believe others would be similar. Would take 5 minutes, 10 minutes max, to do it.

 

[RunningBum]

DH sees it as how much more we can give the charity if we do it as a QCD.

That makes a lot of sense. If you decide you don't need your RMD at all and will give it to charity, you have two choices. You could withdraw the money, pay the income tax, and give the remainder to the charity. Or you could give the whole amount to the charity. The latter results in a larger donation with no financial impact to you since you were going to give it away anyway.

 

[sanfanciscotreat]

I can make coffee with 2 minutes effort. Starbucks is at least 10 minutes. Starbucks is not worth 8 minutes of my life.

Eight minutes is the least cost. Driving there when it is only three miles, six miles round trip costs at least $3.

 

[explanade]

True--if you are not charitably inclined then you probably would not want to do the charitable gift from the IRA just to save the taxes. It makes sense for me because I give a sizable amount to charity anyway. In fact I have made some additional pledges to charitable causes that are important to me with the caveat they have to wait until we are age 70.5 to receive them out of our IRAs. Supporting charities is an important part of our lives.

I mean the example discussed was very generous, 20% of an IRA balance and $100k.

Maybe it would make more sense in the "Blow that dough!" thread instead.

 

[audreyh1]

I mean the example discussed was very generous, 20% of an IRA balance and $100k.

Maybe it would make more sense in the "Blow that dough!" thread instead.

That was just using an extreme example to check his understanding.

 

[RunningBum]

Which is why if you do QCD's, put them off till next year when you'll have RMD's that the QCD's can offset.

QCD's are still allowed this year if you are at least 70.5, up to $100K.

 

[MarieIG]

Had never heard of this, before I read about it on this site. Now I see have to wait until I reach 70.5. Wish it was sooner.

 

[harllee]

Had never heard of this, before I read about it on this site. Now I see have to wait until I reach 70.5. Wish it was sooner.

Yes, you have to wait until age 70.5 to make charitable gifts directly from an IRA. If you want to make charitable gifts anyway doing them from an IRA after 70.5 works out great in my opinion. My DH turns 70.5 soon and we have told several charities we have to put off our gifts to them until he hits that 70.5 mark.

 

[Spanky]

How about taking out a mortgage for a new home?

Since the deduction for interest paid on home-equity loans is eliminated, the remaining option is take out a new mortgage albeit the mortgage-interest deduction will be limited to interest on the first $750,000 of debt.

 

[MasterBlaster]

Don't Ignore Income Based Medicare Taxes (IRMAA)

I scanned though this thread and didn't see any reference to the (substantial) IRMAA Medicare income based taxes that can accrue to those with (modest to large) tax-deferred balances.

Perhaps the best reason to do Roth conversions is to avoid/minimize such taxes.

The (advanced) I-ORP calculator takes them into account when modeling decumulation.

Also note that the sweet-spot for Roth conversions tax-wise (the 10 and 12 % brackets) is almost exactly the same sweet-spot for $0 federal capital gains taxes on taxable accounts (ie same 10 and 12 % brackets). So depending on your asset location, doing Roth conversions sort of precludes taking "free" capital gains distributions.

Michael Kitces says it better than I ever could:

https://www.kitces.com/blog/navigat...-0-capital-gains-vs-partial-roth-conversions/

 

[harley]

IRMAA taxes as well as other cliffs have been mentioned in the thread, as a reason for doing Roth conversions to decrease RMDs. But it never hurts to reemphasize it.

However, I suspect the sweet spot mentioned isn't of that much use in the limiting RMD conversation, because the 0% CG brackets have such low AGI values that doing Roth conversions in those amounts won't make a significant impact on the tIRA values. If your tIRAs are small enough for that to make an impact then your RMDs aren't going to be that big either. If I was in that range and had harvestable CGs I'd do that instead of the Roth conversions. But since I'm already in the 22% bracket I can convert to the top, taking into account things like IRMAA and such.

 

[skipro33]

Admittedly, I did not read all 8 pages, yet, of this thread, but I do have a desire to answer the question which is the title of this thread;
Should RMD's really scare you?

I have my own financial situation to examine and I have my father's, who I was his POA after he was diagnosed with Alzheimers, to examine in retrospect.

For myself, I have all my income need satisfied with my pension. I also started my SS at 62 and my wife started hers last month and back dated it to February when she turned 64. As background, I was diagnosed with cancer in July of 2020, 6 months ago. Firstly, I'm glad I started SS early as I probably won't outlive the actuarial tables even if I survive cancer. The treatments simply will age me quicker than if I hadn't had the disease. Secondly, starting my wife's SS sooner afforded a longer time line of double SS benefits. All calculators indicated that she start sooner rather than later based on my lifespan being shortened by 10 years.
We use the SS funds for those things that enhance our quality of life while the pension covers the necessities. The house is paid for, worth at least $750,000. Medical is 100% covered by my pension as well.
Which leaves our retirement investments. Right now, they stand at $600,000. Not a lot but a whole lot more than most who live solely on their investments when one considers I don't really have a need for any of it. But just because I don't need it doesn't mean I don't want to preserve or grow it. Which brings me to the OP's question regarding RMD's as it applies to me.
I'm in the 22% tax bracket, gross income around $100,000. The bracket tops out at $171,000 for 2021. I theoretically could roll over about $70,000 at a cost of 22% or about $15,400 per year in reduced value to my savings. But what how much would my RMD be on my retirement savings of $600,000? RMD calculators tell me that I would be drawing $37,000 at age 72. That's well within the already 22% tax bracket I would roll the tIRA funds over to a ROTH.
I think, financially, it would be better to let that 22% continue to grow for the next 7 years than to take the hit now and reduce my total worth over the timeline laid out.
I'm unaware of a calculator that would allow me to plug in these numbers for comparison, so I'm not sure, but if anyone can point out some misunderstanding on my part of not taking the conversion hit now and pay the taxes at RMD later, I'd appreciate it.

Oh, and I forgot my father's situation. And it applies to me and probably a whole lot of others. At some point we may need long term health care. Certainly more of our costs in the future will be for health care than now simply because growing older causes more medical issues. My father, towards the end, paid nothing in income taxes because all his income was offset as medical expenses while he was in a memory care facility. As we get older and if long term care is required, the medical cost for that care is written off on taxes, right? So this pot of money I have, the retirement savings I don't have need of today, will fund my and DW's long term medical care and it won't cost us a dime in taxes when it does. So paying the tax to roll to a ROTH is likely to really be the wrong move if it is used for medical needs. Right?

 

[Souschef]

I cannot grasp the concept of a 10 or 12% bracket. The 22% bracket starts at $80K
for MFJ. I guess it is not because I was not an ER. If you are ER and do not have SS and/or a pension, and live off savings, it can be done.
I guess the Roth ship sailed for me many years ago.

 

[RunningBum]

I'm in the 22% tax bracket, gross income around $100,000. The bracket tops out at $171,000 for 2021. I theoretically could roll over about $70,000 at a cost of 22% or about $15,400 per year in reduced value to my savings. But what how much would my RMD be on my retirement savings of $600,000? RMD calculators tell me that I would be drawing $37,000 at age 72. That's well within the already 22% tax bracket I would roll the tIRA funds over to a ROTH.

skipro, you've been facing your cancer situation bravely, so I feel like I can say this and not come off as insensitive. If you die early, what tax bracket will your wife be in? Probably 24%, which is only 2% higher, for now. But those rates may not be renewed in 2026 or whatever year the rate drop expires.

I think, financially, it would be better to let that 22% continue to grow for the next 7 years than to take the hit now and reduce my total worth over the timeline laid out.

It's been posted time and time again that if your current and future tax rates are the same, letting money grow in an IRA does no better than doing the conversion and paying the tax now. And it does better in the Roth if you convert the whole amount and pay taxes from taxable. It's very easy to see in a spreadsheet, or you can just find one of the many times that pb4uski has posted the proof.

if long term care is required, the medical cost for that care is written off on taxes, right? So this pot of money I have, the retirement savings I don't have need of today, will fund my and DW's long term medical care and it won't cost us a dime in taxes when it does. So paying the tax to roll to a ROTH is likely to really be the wrong move if it is used for medical needs. Right?

Yes, but...you'll have to pay RMDs for all those years from 72 until you are incapacitated enough to need LTC. And there is a criteria to meet, namely: that the person is a danger to themself, or is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

Not everyone in the 80s or even 90s will meet this criteria.

 

[skipro33]

skipro, you've been facing your cancer situation bravely, so I feel like I can say this and not come off as insensitive. If you die early, what tax bracket will your wife be in? Probably 24%, which is only 2% higher, for now. But those rates may not be renewed in 2026 or whatever year the rate drop expires.
It's been posted time and time again that if your current and future tax rates are the same, letting money grow in an IRA does no better than doing the conversion and paying the tax now. And it does better in the Roth if you convert the whole amount and pay taxes from taxable. It's very easy to see in a spreadsheet, or you can just find one of the many times that pb4uski has posted the proof.
Yes, but...you'll have to pay RMDs for all those years from 72 until you are incapacitated enough to need LTC. And there is a criteria to meet, namely: that the person is a danger to themself, or is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

Not everyone in the 80s or even 90s will meet this criteria.

Yes! Thanks! I certainly appreciate the frank discussion. I have cash available to pay the taxes on the conversion to the max 22% tax rate of $171,000.
I have an adjusted gross income $91,500 for 2020, standard deduction of $24,800 for a Taxable income of $66,700. So I should be able to convert $104,300 the difference of $171,000 and $66,700. The taxes, at 22%, will be $23,000 (rounded up).
Am I still able to do this for 2020 taxes since it's after the first of the year? And if so, can I also do this year's taxes of 2021 and convert another $104,300 (assuming my income remains the same). I have cash to pay those taxes now as well.
Do I just contact Fidelity where my tIRA is and have them create the ROTH and roll the funds?

I really appreciate the advice. Especially that I pay the taxes out of my current, post tax funds I have in checking, keeping the full IRA invested.

****EDIT****

One new wrinkle that could come into play, pretax money gets added to your income and if that puts you over the 75,000 (single) or 150,000 (married) adjusted gross income, you may be costing yourself future stimulus money. (If there is one based upon 2020 income)

 

[RunningBum]

Unlike contributions, conversions have a 12/31 deadline, so it's too late for 2020.

I don't know the process for Fidelity, but I think I recall for VG I had to open the Roth first before doing the conversion.

 

[skipro33]

Unlike contributions, conversions have a 12/31 deadline, so it's too late for 2020.

I don't know the process for Fidelity, but I think I recall for VG I had to open the Roth first before doing the conversion.

No worries, I still have time to convert all my tIRA to ROTH by age 72 based on my current and predicted income. It also solves any issue with stimulus money based on 2020's income level.
If I understand right, I can open a ROTH IRA as soon as possible, let my new account grow all year, and keep the 22% in cash I have for the tax in my checking account until I do my 2021 taxes.

Let me ask you; I have $100,000 in a guaranteed savings within my tIRA. I'd like to target those funds to fund the majority of the new ROTH. I've been looking for a time to get that money into play, this could be it. Is there any reason not to time this money going into the ROTH? Is there a strategy for doing so? Equal monthly amounts, all at once as soon as possible, end of year, etc.? Or just time when the market takes some sort of correction and dump it over then? Probably should have the ROTH created and ready for that when the time is right.

 

[RunningBum]

Tax payments: Not quite. Unless you have a way to get the taxes paid via IRS withholding, you need to make even quarterly estimated payments, or pay as you go. The even quarterly payments can be based on this year's estimated taxes, or last year's actual payments. Look up "safe harbor" rules.

I'm not big on market timing, but if you can catch a downturn and do it then, that would be a good play. Really, whatever way you want to do it is fine. It sounds like you're only dealing with a small part of your investments.