RMDs are they really something to worry about?

[NW-Bound]

Yes, RMD can be a big deal, not with just higher tax brackets but also the IRMAA.

I am too lazy now to work out all the numbers, but am doing higher Roth conversion to average out the income before I claim SS (soon now), and then get hit by RMD. Not too many years left for Roth conversion.

Much of my investable assets is in tax-deferred accounts, because I drained much of my after-tax savings to live on while waiting for 59-1/2. My wife herself got 7 figures in her own accounts.

And I recently remember the future tax bomb caused by the I-bond interest accumulation since the early 2000s.

Argh. Too lazy to set up a spreadsheet. It's more fun to watch the market to sell covered calls and puts.

 

[Texas Proud]

The divisor is growing but the balance is often decreasing.
My RMD for 2023 is less than my RMD for 2022; how could that possibly be?

My sister's account is growing... or the same... has been for years now..

 

[CardsFan]

But the incremental tax on that $40k RMD is $10,005 or 25%... IMO a 25% incremental tax is a big deal, especially if it can be avoided.

Bold by me.

This is the crux of the matter. If you can avoid it (or more likely just lower it) by Roth conversions, early withdrawals, etc. that makes sense.

But, at some point many of us (DW and I included) will be hit with RMD's that probably will exceed our normal spending. Even with converting over 25% of the original amount (RE date of 2/2016) we have 15% more than we started with in the tIRA.

Mind you I am NOT complaining

So, when RMD's kick in, in 4 more years, I will remind myself that I deferred at a marginal rate over 25%, so even if we pay at that rate with RMD's, we are even.

 

[NW-Bound]

Your putting RMDs on top of other income and computing an incremental tax rate for that RMD is what we call disingenuous.
You could do the same for the pension income or the SS income.

And while that couple is REQUIRED to take RMDs, filing for SS and probably for a pension is totally optional if you don't want the additional retirement income. Which of course is completely silly...

But if the couple can do something to reduce that tax by advance planning such as doing Roth conversion, why should they not do it?

 

[TheWizard]

But if the couple can do something to reduce that tax by advance planning such as doing Roth conversion, why should they not do it?

A most excellent idea, exactly what I did.
AGI Levelizing, I called it...

 

[lucky penny]

Bold by me.

This is the crux of the matter. If you can avoid it (or more likely just lower it) by Roth conversions, early withdrawals, etc. that makes sense.

But, at some point many of us (DW and I included) will be hit with RMD's that probably will exceed our normal spending. Even with converting over 25% of the original amount (RE date of 2/2016) we have 15% more than we started with in the tIRA.

Mind you I am NOT complaining

So, when RMD's kick in, in 4 more years, I will remind myself that I deferred at a marginal rate over 25%, so even if we pay at that rate with RMD's, we are even.

I'm kinda agreeing with that (I think). I'm retired now & since my RMDS are substantial, I've sometimes regretted not doing Roth conversions based on what I read here. But looking at the numbers, my tax rate is now around 24-25%, which is similar to the rate when I was working, so maybe there was never a time when Roth conversions would have been wise. (Too late now, anyway.)

I remember that when IRAs came along, the collective wisdom was that it was a good idea to defer income because your tax rate would be lower when you retired. For me, that didn't happen and maybe I just broke even, but in any case, deferring income seemed a good way for me to save.

 

[NW-Bound]

A most excellent idea, exactly what I did.
AGI Levelizing, I called it...

Yes. For me, it's better to pay 24% marginal tax rate now, than wait to pay 32% later.

I don't think I will be so lucky with the stock market to worry about being bumped up to the 35% bracket, but if it happens I will not be complaining.

 

[NW-Bound]

I remember that when IRAs came along, the collective wisdom was that it was a good idea to defer income because your tax rate would be lower when you retired. For me, that didn't happen and maybe I just broke even, but in any case, deferring income seemed a good way for me to save.

+1

The market god has been so generous, we should not be complaining.

Else, he will take away all the gains. There, no more taxes for you!

 

[TheWizard]

Yes. For me, it's better to pay 24% marginal tax rate now, than wait to pay 32% later.

I don't think I will be so lucky with the stock market to worry about being bumped up to the 35% bracket, but if it happens I will not be complaining.

Well, you seem to be quite aware that paying higher taxes tends to mean a higher amount of money after taxes, especially when the higher taxes are on a continuous basis, not a one time thing...

 

[Eastfolk]

Your putting RMDs on top of other income and computing an incremental tax rate for that RMD is what we call disingenuous.
You could do the same for the pension income or the SS income.

And while that couple is REQUIRED to take RMDs, filing for SS and probably for a pension is totally optional if you don't want the additional retirement income. Which of course is completely silly...

I wouldn’t say it’s disingenuous. I think what he’s trying to get at is there’s little to nothing you can do to avoid pension or SS income (other than to not take it but as you pointed out - that would be silly). However, you may have the ability to avoid or rather reduce your taxes on RMDs (advance roth conversions, etc.) and therefore that’s the component that’s “incremental” and not overblown.

 

[copyright1997reloaded]

I didn't watch the video, no need to. What Aunt Sallie will be paying on her $1M tIRA isn't a lot of interest to me, or that it really isn't "a lot". What is of interest to me is what will need to be declaring as income via my RMD, and yes it *is* a problem (to me).

Schwab's estimator for when I turn 73 for my first RMD is over $115k given a relatively conservative growth rate (6%). That is a lot of additional income that I will be taxed on a single filer. I have a pension, will soon have a small 2nd pension, and have yearly interest income, dividends, and capital gains considerations. ETA: And deferring social security to 70 won't provide me very many years from now to convert.

The result of this is that I will be limited in what I covert (still working at the moment so that makes it even tougher). I will convert what I can to a Roth (at least to the top of the 24% bracket), and it is what it is (I would rather have the money than not), but it is a problem. I will pay my taxes and NIIT (sometimes) and IRMMA penalties (when I finally move to Medicare from my current employer plan) and I will deal with it...but I won't be happy with it.

 

[NW-Bound]

Well, you seem to be quite aware that paying higher taxes tends to mean a higher amount of money after taxes, especially when the higher taxes are on a continuous basis, not a one time thing...

I would be glad to "have to pay" 35% continually in the future, if I should be so lucky to have such high income.

I just don't like to be hit by a tax bomb such as the accumulated deferred interest on the I-bond pushing me into a high tax bracket momentarily, and which could be avoided if I paid a bit of attention.

In my years of working part-time consulting (a euphemism for contracting work), my income was so irregular that one year I had to draw on my savings for expenses, and the next year I had to pay AMT. My taxes would be lower if I had the same income averaged out between years.

There was no way then for me to do income averaging. I remember in the 1980s, I was able to pull off the income averaging when just working for megacorp for W2 wages. The tax law was so different back then.

Youse guys remember deducting interests for car loans, and other personal loans, and not just for mortgages? Tax laws were so different then.

 

[pb4uski]

Your putting RMDs on top of other income and computing an incremental tax rate for that RMD is what we call disingenuous.
You could do the same for the pension income or the SS income.

And while that couple is REQUIRED to take RMDs, filing for SS and probably for a pension is totally optional if you don't want the additional retirement income. Which of course is completely silly...

Most retirees will have been collecting pension and SS before RMDs start, in some cases for many years, so RMD income is truly incremental to pension and SS income as are the resulting taxes.

What is silly is claiming that RMDs are overblown. RMDs start at 73 so nobody in their right mind would defer SS beyond age 70 if they don't "want the additional retirement income" because SS doesn't grow after age 70, so that is ridiculous. Also, I can't conceive of any instance where it would be wise for someone to defer their pension in their 70's so that's a bit silly too.

You can't really control the pension or SS so much other than when it starts within limits, but in many cases RMDs can be either avoided or reduced with better tax planning by doing aggressive Roth conversions between ER and when pensions and SS begin, delaying SS so that one can do more aggressive Roth conversions, etc.

 

[pb4uski]

RMDs are overblown as a problem area.
$1M in tax-deferred is only $40k/year in RMD income, more or less.

But at some point in your working years, if it looks like you have plenty in tax-deferred, then put more in Roth accounts and after tax accounts.

In my case, I have three retirement income streams that contribute to my AGI: pension/annuity, SS, and RMD.
RMD is the smallest.

Actually, dividends and interest is the smallest, but I'm skipping that...

But if the couple can do something to reduce that tax by advance planning such as doing Roth conversion, why should they not do it?

A most excellent idea, exactly what I did.
AGI Levelizing, I called it...

So if you did take action to levelize your AGI to mute the impact of RMDs (which I applaud) then how can it be "overblown as a problem area"?... you obviously thought it was significant enough to do something about. Would RMD still be the smallest if you hadn't done AGI levelizing?

 

[NW-Bound]

Speaking of Roth conversion, I have not done this year yet. I need to convert a 6-figure amount, same like last year. The market has been doing so well YTD, I kick myself for missing out.

But now that the market started to tank, should I wait some more? Heh heh heh, this market timing business is never easy.

 

[Retire52]

In my DW and I's case, I am going with the assumption that the tax brackets remain the same into the future. I plan to draw down our 401ks when my DW and I reach 59.5 to the tune of #100k/yr. I estimate we will have $1.1m in 2 years when we begin withdraws. Should last about 20 yrs, given a 7% annual return, before we zero out the acct. We will hit RMDs in the last couple years.

We intend to leave our ROTH and taxable accts as an inheritance to our adult children, they can have both tax free with the ROTH and step up basis on the taxable investments we give them. Also want to draw down the 401ks while we are both likely to be able to file as joint taxable income. If we wait to RMDs, higher chance one of us may not be around to keep the tax rates lower.

I'm thinking it will be a bigger lift for the next administration to raise tax rates. I could be wrong and the tax brackets would revert back to 2017 rates, and we will go from 24% to 33%. $9k in additional taxes each year I can live with.

The accountants and engineers will likely consider this less than optimal, but all the roth conversion analysis is hurting my brain.

 

[NW-Bound]

It's hard to predict what the tax policies will be, and also what return the market god will bestow. That's why I have not bothered to do a spreadsheet.

I remember looking at the MFJ tax brackets, and telling myself that if I fell down to the 12% bracket, things would be so bad taxes would be the last thing I worry about.

We will be in the 24% bracket with RMD if our stash does not grow at all.

Can it grow to put us in 32% bracket? Possible, but that's a dream, not a plan.

Can it crash to drop us to the 22% bracket? This is certainly possible. I have been through so many bear markets to rule anything out.

So, in most likelihood, we will be in the 24% bracket when RMD starts. So, why not pay 24% now with Roth conversion to get it over with?

But, but, but, how about just convert to 22%? If the market tanks, then I am not paying too much too early. And if it does not tank, then we will pay 24%, and why pay that now instead of later?

So, I should convert to the top of 22% only. This is just by eyeballing and no spreadsheet involved.

Of course, if you are afraid that the taxes will be increased later, then, boy, how does one deal with so much unknown?

PS. If I am so lucky that the market grows like wild fires, then I could step up the Roth conversion from the top of 22% to the top of 24%. The difference between these brackets is huge, and should absorb any outrageous market gain. Hah, dream on.

 

[Koolau]

The RMD thing may or may not be an issue, depending on many factors. The issue I see is that people don't know up front how to play the game and by the time they figure out there is a game - it's too late. I am learning that I didn't know very much going in. Playing catch up is never fun.

 

[NW-Bound]

Forgot one other unknown. If I croak early, then my widow will pay taxes through her nose. Tough.

I guess she will need a smart pool boy to help figure it all out.

 

[Koolau]

Forgot one other unknown. If I croak early, then my widow will pay taxes through her nose. Tough.

I guess she will need a smart pool boy to help figure it all out.

So if she asks to have a pool installed - you might want to watch your back.

 

[NW-Bound]

I already have a pool that's larger than the average. Takes too much maintenance as it is. I am the pool boy.

 

[Texas Proud]

Your putting RMDs on top of other income and computing an incremental tax rate for that RMD is what we call disingenuous.
You could do the same for the pension income or the SS income.

And while that couple is REQUIRED to take RMDs, filing for SS and probably for a pension is totally optional if you don't want the additional retirement income. Which of course is completely silly...

I would say it is at the top of the income stream...


If you do not file for SS or pension you more than likely lose that 100%... with an IRA you have an asset that you potentially can leave to someone else...


You can do things to lower your RMDs by taking some income early, converting etc., but not that many things that can help with total tax due on SS and pensions...

 

[Badger]

The RMD thing may or may not be an issue, depending on many factors. The issue I see is that people don't know up front how to play the game and by the time they figure out there is a game - it's too late. I am learning that I didn't know very much going in. Playing catch up is never fun.

I recognize this situation all too clearly. I did conversions for a few years then gave up when I realized I couldn't make enough of a dent in the tIRA to influence our RMD or taxes enough. Now we have been taking our RMDs for the past 4 years and don't have any wiggle room to make conversions. If I was to sell taxable stocks or MFs to stop some of the taxable dividends then the capital gains would put us into a higher tax bracket so that wouldn't be any better than making conversions. I never in my wildest dreams thought I would be in this situation. I was just saving every penny that I could to make sure we would not be eating beans and rice all through retirement.

Forgot one other unknown. If I croak early, then my widow will pay taxes through her nose. Tough.

I guess she will need a smart pool boy to help figure it all out.

I have been concerned about this (the higher taxes not the pool boy) for quite a while. If a smart pool boy is the answer once I am gone then more power to her.

Cheers!

 

[Time2]

Also, you can start taking money out of tax deferred accounts at age 59-1/2, either as ordinary income or as Roth conversions.
Waiting until age 72+ when distributions from those accounts are REQUIRED is a mistake if you have a large balance...

That is an idea that never I have never been exposed to!

That is, doing Roth Conversions while we still had work income, we still had room in the lower tax bracket.

While still staying in the 12% tax bracket, it may have only subtracted an extra $80k out of deferred accounts for us (in the extra 4 years), but for those that will get a pension or two, plus SS or two, they may be good doing Roth Conversion at the 22% bracket.


Also let's not forget we will probably revert back to the higher brackets in 2025. 12% will rise to 15% and 22% will rise to 25%, if it is not renewed.

 

[Andre1969]

The divisor is growing but the balance is often decreasing.
My RMD for 2023 is less than my RMD for 2022; how could that possibly be?

Don't they calculate the RMD based on the market value of the last trading day of the year before? So, more than likely, thanks to the economic turmoil of 2022, you had a smaller 401k/IRA balance on 12/31/2022 than you did on 12/31/2021.

I have two inherited IRAs. One was from my Grandmom, that I got in 2015 for around $4800. The other was from my Dad, around $69,000 in 2017.

I believe the divisor for these two actually grows more aggressively than a "normal" IRA because they're designed to deplete completely by the time I turn 83 or 84. In contrast, a "regular" IRA never depletes completely. Even at the age of 120 and beyond, the divisor is two. So you're taking out 50% each year. However, it's always 50% of an ever decreasing number....not taking half out at 120 and the remaining half at 121.

As for the balances of my inherited IRAs, I think Grandmom's is still around $4800. I have most of it in a healthcare fund that's somewhat aggressive, so it bounces around alot. It was a small amount to begin with, so I figured I'd invest it aggressively and see what happened. The IRA I got from Dad is now somewhere around $80,000.