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

[Out-to-Lunch]

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...

Yes, I had to read it twice, but I realized you meant something like: "Once your RMDs start, your options are more limited. You can do QCDs; also, after completing your RMD, you can do Roth conversions."

 

[TheWizard]

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...

Good points.
"Levelizing" is a bit simplistic. I meant it to include inflation from year to year.

And yes, investment returns in your tax-deferred accounts are a real Wild Card, especially if you have a high stock allocation (I'm 95% stock funds nowadays.) All you can do is reassess your plan once a year based on actual portfolio performance. There have actually been a few years between 2013 and now where my portfolios declined in value.

There are at least two good reasons to focus on a levelizing concept:
1) to get folks to begin withdrawing from their DEFERRED COMPENSATION accounts immediately after retirement. As mentioned, these withdrawals will generally be some combination of Roth conversions and living expenses, depending on how much the person has in taxable account along with pension income.

2) to get folks away from the simplistic "convert to top of current tax bracket" scheme. For example, a single person with taxable income before Roth conversion of $46,000 this year only has about $2500 of room before topping out the 12% bracket and getting into the 22% bracket. A $2500 Roth conversion is likely too small to make a significant difference down the road...

 

[SecondCor521]

^ I agree with the concept of revisiting annually, which is what I do. It incorporates any changes over the past years, and also over time can give you a clue if you're tracking about right or not.

I agree with at least some sort of levelizing being much better than not levelizing at all. Probably by quite a large amount.

On your last point, yes, a small conversion is probably not going to make a big difference. But if it were the right thing to do, I'd do a small one anyway. But the larger point you're making - that there may be better options than just converting to the top of the bracket - I agree with wholeheartedly as well.

 

[pjigar]

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

Correct, but those cells are calculated from "age" cells so you may not need to modify them:

Only modify most of the "blue cells" on your first pass. If you need to customize the "white cells" with the formula then understand the formula first before changing the formula.

 

[pjigar]

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.

In my earlier versions of "RMD Scenarios" google sheet, I tried to account of inflation of tax brackets but then the calculations were very difficult because now have to adjust everything for "inflation": FV of incremental investment, FPV of existing investments, and so on. So eventually I simplified and calculate everything for "today". We keep calculating "today" scenario every year which is sufficient for our purpose of this exercise i.e "How much to Roth convert or contribute this year during this phase of my age?"

 

[SevenUp]

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.

Roth Conversion and Capital Gains On ACA Health Insurance might be useful for you.

 

[KingMota]

My wife and I were in a similar situation to tominboise with both of us on ACA healthcare for several years and needing to manage our AGI to keep our healthcare costs in check. We have been doing this for five years now. My plan has always been to focus on doing heavy IRA to ROTH conversions (up to practical tax bracket and IRMAA limits) during the years my younger wife reaches Medicare age and before I file for SS at age 70. We will start this next year as she turns 65 in May so we will forfeit only four months of ACA subsidies.

At retirement, we were about 50/50 post tax brokerage and IRA. We are now about 65/35 since our brokerage is mostly equities and IRA mostly CD's. For the ~$15k Roth conversions I have been doing each year while managing AGI I have been doing some growth stocks I own (like Palantir) trying to get them over to Roth before they explode.

I have never gotten the maximum ACA rebate but thankfully there has been no cliff through 2025. I don't know how close you allow your AGI to get to the income limits where you could get burned if that law is not extended.

As many have suggested you can get on sites and project your RMD's and taxes in various scenarios and decide if preserving the ACA credits now or doing IRA conversions now is more valuable.

 

[shortstop14]

My wife and I were in a similar situation to tominboise with both of us on ACA healthcare for several years and needing to manage our AGI to keep our healthcare costs in check. We have been doing this for five years now. My plan has always been to focus on doing heavy IRA to ROTH conversions (up to practical tax bracket and IRMAA limits) during the years my younger wife reaches Medicare age and before I file for SS at age 70. We will start this next year as she turns 65 in May so we will forfeit only four months of ACA subsidies.

We had a similar plan. Kept our income down for ACA subsidies from age 56 until transition to Medicare. Income tax was minimal to none during those years. But the Roth conversions haven't happened much in the first years after 65, due to some gifting from the remainder of the taxable account and from the IRAs. Four more years before the RMDs start, and we'll turn on my Social Security next year at 70.
I think I'll be paying the price for those early tax avoidance years once the RMDs start, because I doubt I'll make a big dent in the IRAs before age 73 unless I do some painful conversions. It was probably the right plan at the time, though.

 

[Koolau]

We had a similar plan. Kept our income down for ACA subsidies from age 56 until transition to Medicare. Income tax was minimal to none during those years. But the Roth conversions haven't happened much in the first years after 65, due to some gifting from the remainder of the taxable account and from the IRAs. Four more years before the RMDs start, and we'll turn on my Social Security next year at 70.
I think I'll be paying the price for those early tax avoidance years once the RMDs start, because I doubt I'll make a big dent in the IRAs before age 73 unless I do some painful conversions. It was probably the right plan at the time, though.

Yeah, most of us have had to play the game. It can be a bit of the talk wagon the dog, but it's the only game in town. Thanks for sharing.

 

[Route246]

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

Can you explain the difference between 401(k) and tIRA in terms of why you are glad you don't have to manage tIRA RMD (vs 401(k))? I'm dense about this.

 

[TheWizard]

Can you explain the difference between 401(k) and tIRA in terms of why you are glad you don't have to manage tIRA RMD (vs 401(k))? I'm dense about this.

I'm not Koolau but I'm in a similar situation with tax-deferred $$$ in both my 403(b) and my tIRA.
I prefer it that way and will likely rollover more to my tIRA later this year.
Two reasons: I can do QCDs from my tIRA and I have unlimited options to invest into...

 

[Sunset]

Can you explain the difference between 401(k) and tIRA in terms of why you are glad you don't have to manage tIRA RMD (vs 401(k))? I'm dense about this.

They are treated separately.
For RMD's you have to take the proper percentage from your 401K based on the 401k value at end of prior year. (Might have to do for each 401K, that I don't know)

You also need to take the proper percentage from (1 or more IRA) based on all the IRA values added together at end of prior year.

 

[Montecfo]

From the details laid out, I doubt that Roth conversions will make much difference in your RMD. But it still makes sense to manage taxable income opportunistically to minimize tax in my view i.e. convert where it makes sense.

Taking TI now to preserve and lock capital gains for the future assumes a lot. But what is clear is that will mean paying taxes now in hopes of heirs not doing so later.

It is complicated math. My view is heirs will be delighted to get a chunk of funds and probably worry less about taxability. Given the things you do not know (future tax law, longevity, future market gains/losses) it seems like a needle threading exercise to my eyes.

 

[TheWizard]

They are treated separately.
For RMD's you have to take the proper percentage from your 401K based on the 401k value at end of prior year. (Might have to do for each 401K, that I don't know)

You also need to take the proper percentage from (1 or more IRA) based on all the IRA values added together at end of prior year.

Essentially correct.
And most custodians have automatic plans you can set up to withdraw your RMD in equal monthly or quarterly payments. Once you do that, there should be minimal complexity going forward.

But if you plan to do QCDs, then it's likely better not to do automatic regular distributions from your tIRA...

 

[Koolau]

Can you explain the difference between 401(k) and tIRA in terms of why you are glad you don't have to manage tIRA RMD (vs 401(k))? I'm dense about this.

For me, it was only needing to dread (or worry about) one fund that needed RMDs managed each year. Nothing special about one over the other. It's just that I only have one RMD each year.

 

[Koolau]

I'm not Koolau but I'm in a similar situation with tax-deferred $$$ in both my 403(b) and my tIRA.
I prefer it that way and will likely rollover more to my tIRA later this year.
Two reasons: I can do QCDs from my tIRA and I have unlimited options to invest into...

Good point. If I want to do a QCD, I have to open a tIRA, fund it from my 401(k) and then carry out the QCD. So there's that. I wan't thinking that far ahead.

 

[Al18]

From my experience, it’s pretty simple to roll a 401K to an IRA. It’s requires some intervention if you have untaxed earnings in your 401K.

 

[Koolau]

From my experience, it’s pretty simple to roll a 401K to an IRA. It’s requires some intervention if you have untaxed earnings in your 401K.

Sorry. Not sure what you mean. All my 401(k) is untaxed at this point (IOW it's all fully taxable funds). Please fill me in on the intervention you mentioned. Thanks.

 

[Montecfo]

Sorry. Not sure what you mean. All my 401(k) is untaxed at this point (IOW it's all fully taxable funds). Please fill me in on the intervention you mentioned. Thanks.

I'm going to guess he meant if you have *taxed* earnings in the 401k.

 

[Koolau]

I'm going to guess he meant if you have *taxed* earnings in the 401k.

Ahh. Yes. Not a problem to me but I recall dealing with that issue in DW's tIRA.

 

[TheWizard]

From my experience, it’s pretty simple to roll a 401K to an IRA. It’s requires some intervention if you have untaxed earnings in your 401K.

It's simple but somewhat annoying in my case.
My 403(b) custodian (TIAA) cuts a paper check for the requested rollover amount and then snail mails it to Vanguard in El Paso, which takes a week.
Then Vanguard puts a five day hold on this suspicious paper check to see if it actually clears.

So I'm out of the market with those funds for two weeks basically.
This fall, my plan is likely to do 2 or 3 smaller rollovers to reduce this effect. We'll see...

 

[Koolau]

It's simple but somewhat annoying in my case.
My 403(b) custodian (TIAA) cuts a paper check for the requested rollover amount and then snail mails it to Vanguard in El Paso, which takes a week.
Then Vanguard puts a five day hold on this suspicious paper check to see if it actually clears.

So I'm out of the market with those funds for two weeks basically.
This fall, my plan is likely to do 2 or 3 smaller rollovers to reduce this effect. We'll see...

Welcome to the world where companies maximize their profits at your expense. Who wouldda thunkit? Heh, heh, tell me you wouldn't take advantage of THEM if you had the chance.

 

[Al18]

Sorry - meant to say taxed amounts in your 401K.

 

[orbops]

I also try to keep my AGI low for ACA premiums.

One thing I am gradually moving towards with regards to RMDs is to start replacing my higher earning stocks/mutual funds from my Rollover IRA and replacing them with 4%ish CDs and buying higher earning stocks/mutual funds into my Roth. I'm 58 now, so I've got 17 years to really reduce my Rollover IRA. I plan on doing small annual Roth conversions, and withdrawing from my brokerage account primarily. As I get closer to 70 for SS, I'll have to see how my AGI is at that time.

 

[Stormy Kromer]

I may be different.

I don't want to leave a tax bomb to my estate such as a traditional IRA. I am starting to withdraw my traditional IRA now at 59 1/2 and letting my other funds grow and end up in my estate, such as Roth IRAs, and brokerage accounts, these will get a stepped up basis. The traditional IRA's will get crushed when we die.

There is no free lunch folks. The government is going to get their share now or later.

In my opinion, way too many people worry about RMD's. You should live on tax deferred accounts while you can (pay the tax or your kids will) and save your other funds ( Roth's and brokerage accounts) for your estate long before you get to RMD age.

I think a lot of this thought is that all our lives we're taught...."Lets see how big I can get this tax deferred account can get !!!!. Then complain when we have to take it out...we knew the rules when we started....we had to take it out. The government owns 1/3 of it...take it anyway.

Look at it from a different perspective.....don't leave your kids a tax bomb. Consider living off of your IRA's when you turn 59 1/2, pay the tax and let your other investments grow that they can inherit more efficiently.



Good luck, if this impacts you, you're fortunate.

Good night. We are lucky.