7 years until RMD's start - question on withdraw strategy going forward.

[tominboise]

I am 65/DW is 63. We both have IRA's, I have a Roth, and we have a joint brokerage account. The bulk of our investments (82%) is in the IRA's. We have been drawing money from the brokerage account to live on for the past 4 years, to manage our income levels for an ACA subsidy. I have done small ROTH rollovers every year.

We will have substantial RMDs from the two IRA's in 7 to 10 years, with a tax bracket of 25% or higher. My question now, is should I reduce or stop taking money from our brokerage account now and start taking more $$ out of the IRA's, both to live on and roll into the Roth? I realize my taxes now will be higher but I could manage them to better hit the lower 12% or 22% brackets. The brokerage account would become an inheritance for our two kids, with the basis step up that comes with that (assuming we don't need it to live on between now and then).

Taking $$ out of the IRA now should reduce the amount of RMD later, although given the growth in the market, it may be futile. I have not yet started SS - waiting until 70. We haven't decided when to start DW SS.

 

[Koolau]

I didn't have to manage ACA so I did what you suggest. I Roth converted between retirement and RMDs. By the time I got to RMDs all I had left was my 401(k) and no tIRAs to deal with. I could manage to keep my taxes where I wanted them at the time.

Now, I only have to worry about the 401(k) as far as RMDs. It is still substantial and the RMDs are growing because the funds are growing and my age is increasing. SO glad I don't have to manage tIRA RMDs. YMMV

 

[SecondCor521]

It does sound like doing more Roth conversions now to pull forward some of that RMD income would make sense.

I hope your 25% estimate includes consideration of your Social Security income(s) and an estimate of IRMAA. If not your future rate may be even higher and you might feel more strongly about more conversions sooner. Also, the surviving spouse will probably be in a higher tax bracket for a while.

You can probably Roth convert up to the top of 22%, although you should include the marginal effects of ACA subsidy loss too in deciding how much to convert now.

I like the approach of just Roth converting as much as makes sense, then you can take from the Roths what you need to spend. This way any unspent money remains in the Roth tax-free rather than in taxable with some (hopefully modest) tax drag.

I've been Roth converting for about nine years, and while it has been futile in the sense that my traditional IRA balance is more than twice what it was when I retired, it is not futile in the sense that my traditional:Roth ratio has gone from about 5:1 to about 3:2. More importantly, I've been able to convert at rates averaging maybe 15% instead of close to 30% later.

 

[walkinwood]

First - everyone born in 1960 or later has to take RMDs at 75.

This is a complex problem with a lot of variables. My suggestion would be to get a software program that can handle this complexity. There are a few threads recently on these products. Search this forum for Boldin, Right Capital and Pralana.

 

[SnowballCamper]

I think about it this way. Whatever I think my marginal tax rate will be when RMD's start, I want to have income almost up to that level until then. Because I'll pay a smaller tax rate now versus a larger one later. The medicare premium schedule can make this messy, but I don't bother with those details yet.

 

[Exchme]

First - everyone born in 1960 or later has to take RMDs at 75.

This is a complex problem with a lot of variables. My suggestion would be to get a software program that can handle this complexity. There are a few threads recently on these products. Search this forum for Boldin, Right Capital and Pralana.

Agreed.

Each tool has its own way of doing things that may require thinking about how to approximate what you want to do.

OP needs to be prepared to spend some time and for heaven's sake come back here and go through some specifics before actually making the conversions. We've had more than one person misunderstand what a calculator is doing and then convert to crazy-high tax brackets, costing themselves really big money in unnecessary taxes.

The bogleheads.org wiki has an article about Roth Conversion math and there are innumerable threads here and over there where folks discuss the nuances and offer advice when folks post enough information to dig in.

 

[Koolau]

Back when I was still "Rothing" I never put too fine a point on it. If I wandered a few hundred or a couple of thousand into the next tax bracket, I didn't kick myself.

 

[pb4uski]

Rather than withdraw from IRAs, I would continue to use taxable funds to live on and then Roth convert to the top of the 12% tax bracket or perhaps even more.

When considering the tax cost include lost ACA subsidies.

 

[TheWizard]

Yes, you should definitely be withdrawing from tax-deferred for some combination of living expenses and (mostly) Roth conversions.

It's hard to say how much without putting together a spreadsheet of your financial situation and making certain market assumptions. But target at least 6-7% of your tax-deferred amount per year.

If your tax-deferred accounts have a high stock allocation, then even a 10% annual withdrawal rate is not going to reduce the balance in years like 2023 and 2024.
But it's possible stocks will have a down year at some point...

 

[TheWizard]

Note: there's no need to attempt to Roth convert all of your tax-deferred money. The goal is to get down to the level where RMDs are not large compared to your other retirement income streams.
My RMD is my third largest stream, less than my SS, so I'm in fine shape...

 

[TheWizard]

I think about it this way. Whatever I think my marginal tax rate will be when RMD's start, I want to have income almost up to that level until then. Because I'll pay a smaller tax rate now versus a larger one later. The medicare premium schedule can make this messy, but I don't bother with those details yet.

Exactly, although I look at AGI rather than marginal tax rate.
I call this levelizing your AGI...

 

[Koolau]

Note: there's no need to attempt to Roth convert all of your tax-deferred money. The goal is to get down to the level where RMDs are not large compared to your other retirement income streams.
My RMD is my third largest stream, less than my SS, so I'm in fine shape...

That's great. My RMD is also smaller than (DW's and my) SS (she has no RMDs). But it's still a close second because my results (and age) keep pushing my RMDs higher. Not a bad problem to have, but I should have probably put less into my 401(k) and/or Rothed more even earlier.

Heh, heh, next time...

 

[Koolau]

Exactly, although I look at AGI rather than marginal tax rate.
I call this levelizing your AGI...

Can you flesh this concept out for me, please? (Remember that I'm a bit dense.)

I worry about my AGI (virtually my MAGI) to avoid (usually) IRMAA. What else is meant by levelizing AGI and what are its benefits. (I'm sure I'll have another moment when you explain it.). Thanks.

 

[TheWizard]

Can you flesh this concept out for me, please? (Remember that I'm a bit dense.)

I worry about my AGI (virtually my MAGI) to avoid (usually) IRMAA. What else is meant by levelizing AGI and what are its benefits. (I'm sure I'll have another moment when you explain it.). Thanks.

Levelizing your AGI is most meaningful in your 60s before starting SS at 70 and then RMDs later.
Take a single age 62 retiree with $50k per year to live on from pension or annuity.
Assume projected SS at 70 is $40k per year.
Assume projected RMD at 73/75 is $50k per year.
So you pull $90k per year from tax-deferred, Roth converting most of it, depending on where the additional income tax comes from.

At age 70, start SS and reduce Roth conversions to $50k per year.

At age 73/75, start RMDs and pretty much stop Roth conversions.

So your AGI stays ruffly the same, increasing a bit with inflation but no silly TORPEDOES at start of SS or RMDs.

As a practical matter, you need to revisit your spreadsheet plan each year since the value of your tax-deferred accounts cannot be predicted accurately year to year.

Also need to monitor IRMAA tiers and decide which one you are likely to stay in. Then possibly adjust Roth conversion amount to avoid higher tier.

Several moving parts obviously...

 

[Koolau]

^^^^^^^^

Got it. Thanks. Very useful - especially to our younger members. I sorta did this but in a less disciplined manner.

 

[pjigar]

Many have chimed in on the complexity of the Roth conversions. Your goal is to equalize/level the taxes through various phases before RMD kicks in. Understand the moving parts first. Then you can use my google sheet (highly customized for my own scenario and assumptions) as a baseline to build your own.

RMD Scenarios

docs.google.com

 

[Koolau]

Many have chimed in on the complexity of the Roth conversions. Your goal is to equalize/level the taxes through various phases before RMD kicks in. Understand the moving parts first. Then you can use my google sheet (highly customized for my own scenario and assumptions) as a baseline to build your own.

RMD Scenarios

docs.google.com

I wish I had this when I was young - you know, when I was in my early 60s.

 

[Badger]

All I knew was how to save and a little about how to invest. For about 20 years we maxed out our tIRA, Roth IRA, and with what was still left after living expenses I bought a few shares of MFs. Only a bout 5 years before retirement did I learn about converting some of the tIRAs but it was too complex for my limited understanding and I didn't convert enough.
Now a few years into RMDs I find it was too little, too late. If I understood how not converting enough would come back to bite me I would have converted much more to Roths.

 

[TheWizard]

Once your RMDs start, your options are more limited. You can do QCDs and Roth conversions after completing your RMD.

But if you're in IRMAA territory, doing too large Roth conversion could bump you into a higher tier.
My Roth conversion last month for 2024 was just $16,000...

 

[tominboise]

Rather than withdraw from IRAs, I would continue to use taxable funds to live on and then Roth convert to the top of the 12% tax bracket or perhaps even more.

When considering the tax cost include lost ACA subsidies.

This is what I will be doing - increasing the Roth rollover. I will have 10 years before RMD's start for me. 12 years before they start for my wife's IRA.

 

[tominboise]

Many have chimed in on the complexity of the Roth conversions. Your goal is to equalize/level the taxes through various phases before RMD kicks in. Understand the moving parts first. Then you can use my google sheet (highly customized for my own scenario and assumptions) as a baseline to build your own.

RMD Scenarios

docs.google.com

This is great - thanks! I have a question. In these cells, is the years in Pre RMD the years after SS? In other words, I have 5 years to SS, and then 5 more years to RMD? Or should RMD be 10?

Years in pre-SS	5
Years in pre-RMD	5

 

[SecondCor521]

Once your RMDs start, your options are more limited. You can do QCDs and Roth conversions after completing your RMD.

I agree that Roth conversions must be done after RMDs.

However, QCDs can be done at any time during the year, and always count towards any as-yet-unmet RMD.

 

[audreyh1]

QCDs count towards your RMD.

You can choose to meet your entire RMD from QCDs (up to ~100K), and do Roth conversions beyond that.

 

[SecondCor521]

Exactly, although I look at AGI rather than marginal tax rate.
I call this levelizing your AGI...

There are pros and cons to levelizing AGI rather than marginal rate.

The main pro I see is that AGI is much easier to figure than marginal rate, so it's faster and simpler to levelize AGI. Being simpler, it's also much less likely to be in error. And honestly, it's probably close enough to be a good solution.

But since I like to make things complicated...

The con is that there are a number of things which impact marginal rate beyond AGI so it's possible to have the same AGI and a different marginal rate:

1. Filing status - AGI may also change when the first spouse passes, but the marginal rate will also change a lot as the person goes from MFJ to Single (or, in rare cases, QSS or HOH).

2. Inflation - tax brackets adjust by inflation every year. The $90K income in the example in post #14 will be taxed more harshly at age 62 than at age 75.

3. SS taxation - Only 85% of SS is taxed at most, and for modest incomes it can be anywhere from 85% to 0%. So simply adding all of SS to AGI introduces an error.

4. IRMAA bracket inflation - similar point to #2, but IRMAA brackets inflate each year also.

5. Investment returns exceed inflation. My investment returns exceed inflation. Over a decade or two, that has real impacts on my future RMD that I need to include. For people investing more conservatively, or people much closer to RMD, this factor won't matter as much and can probably be ignored if you want simplicity.

 

[TheWizard]

I agree that Roth conversions must be done after RMDs.

However, QCDs can be done at any time during the year, and always count towards any as-yet-unmet RMD.

Exactly true and was what I meant, though my language may have been fuzzy.
You can even do QCDs beyond your RMD though that's not my plan...