Apparently, RMDs are a problem now

[SecondCor521]

Hi all.

This has been bugging me for a while now and I am posting to see if I'm missing something. I don't think I am. Also to vent a bit.

I've noticed a trend among some of the personal finance videos who are in their 30s and 40s, as well as some (presumably younger) posters on this board and on other boards talking about the problems with RMDs. Here's one example:

The problem seems to be that when you're older and wealthy, then your RMDs will gradually increase and you'll be taxed more.

I understand pretty well how RMDs work, and how the taxation interacts with pensions and SS and IRMAA.

I also understand how there is a long range tax planning opportunity for early retirees to voluntarily pull from their tax deferred accounts earlier in life (pre-RMD) in order to shift some of those later year higher taxed dollars into earlier lower tax brackets. I know we debate this on the Roth conversion threads regularly, but I think most of us here at least understand the basic idea regardless of our personal stance on the question.

What is bothering me is that I don't really think what they're calling problems are problems. On one hand, they're saying that when you retire it'd be nice to have an increasing income to spend and take care of you and your family's needs and wants, and it'll be so nice to have SS and a pension. And most of us understand that we have a progressive income tax system in the US. What they're calling a bug I mostly see as a feature.

I think the reason they talk about these things as problems (as in the YouTube linked video above) is that they stand to gain from people agreeing with their assertions. I didn't listen to all of it but at the very end of the YT video there seemed to be a call to action to hire them to help you solve these problems. Classic marketing.

It's slightly akin to my parents' estate planning journey. They paid attorneys to write up their initial plan to avoid <problems>. They then paid more money to avoid other <problems>. Then my Mom passed away and my Dad paid more money to an attorney to address <problems> which were partly a result of the prior planning. Now that my Dad is on hospice I can see other <problems> that some attorneys say could be fixed by, you guessed it, more estate planning and legal services.

Maybe I'm just a bit grumpy and stressed. Thanks for reading.

 

[COcheesehead]

Preach brother, preach.

So many are taking steps today tip toeing around other ramifications like ACA, IRMMA, higher tax brackets, taxed SS to minimize RMDs resulting in the need to pay a tax in today’s dollars or forgoing income in today’s dollars to maybe avoid an unknown tax in tomorrow’s dollars that we may or may not owe and will likely have other options to deal with the issue (QCDs for example) in 20-25 years (my timeframe).

 

[pacergal]

Like my Dad always said, You make the money, you pay the taxes. I'd rather make more money than not.

 

[qwerty3656]

I'm a believer in tax planning and the more information the better. I actually like these guys (Merit Financial Advisors).

 

[Car-Guy]

For decades I put as much as I could in 401k's and IRA's to shelter income by the rules in place then. Heck I was always in the higher brackets when I worked so why change that now! Except they changed the rules in ~2003 and started hitting us with IRMAA taxes a few years later.

 

[tulak]

I don’t think you’re missing anything. It annoys me too, but everyone is out to make money and most of this stuff is some form of self-promotion. They’re selling their story and best way is to create “problems” that need solving.

I never got into the entire youtube influencer scene and whenever I see these videos, I cringe. I realize there’s probably some good content out there, but it’s likely hard to find. And if you’ve been reading about this stuff over the years, you probably know more than most people out there. They need to hustle though, and if it works for them, more power to them.

As for RMDs, I will try to minimize how much I pay, but I don’t think of it is a problem that I need to solve. For example, if I wanted to avoid RMDs, then I can rollover everything to a Roth and pay the tax. Problem solved, but likely not a good strategy.

 

[38Chevy454]

In my simple explanation, RMD are not the problem. It's the tax increases due to the RMD that's the problem that is trying to be solved. I'm another person that has too much in pretax, after all that is what was recommended to avoid taxes when working. Adding some great compounding and 100% equity investment has made a big chunk that Uncle Sam wants to get a share of. So my planning, or call it problem solving, is to try and minimize the share Uncle Sam gets.

 

[Handymike]

Last year I finished converting my TIRA to ROTH so no issues with taxes or bumping me into a higher and higher bracket. My ROTH continues to grow nicely, all tax free, and since SSA pays all my current bills with plenty to spare monthly all ROTH gains are reinvested into existing positions or new ones as I see fit. I live in SoCal so cost of living is pretty high but manageable for us.
Mike

 

[djsander]

My wife told me this morning to be more positive and stop the grumpy old man syndrome. So, all I can say is paying more taxes is nice as it means we have made more money. Which in turn means we get to do more and spend more.

 

[TheWizard]

Didn't we just discuss this video topic in a different thread?
Regardless, here's the salient point: tax-deferred accounts are what I prefer to call Deferred Compensation. So in retirement, you withdraw from tax-deferred as Ordinary Income both before and after RMD age. Note: prior to RMD age, you can withdraw as Roth conversions.

Here's another point: In retirement, it's usually better to have your AGI increasing with inflation or a bit more each year, rather than jumping around wildly.
An AGI of $200k this year and $400k next year isn't optimal with our progressive tax system.
But sometimes there's no choice if you're selling an investment property or similar.

Here's a third point. Having a stable and increasing income in retirement is not a bad thing, regardless of freaking taxes. Your annual income is $300k and your expenses are $180k.
This is a good situation whether in your working years or retirement years.

Ignore all statements to the contrary...

 

[REWahoo]

Didn't we just discuss this video topic in a different thread?

This one?

RMD's don't matter?

This guy says most retirees fear of a big tax hit from RMDs is largely unfounded due to changes in RMD rules over the past few years. He discusses how revisions to deduction amounts, tax brackets, RMD starting age and IRS life expectancy tables have combined to significantly reduce the tax...

www.early-retirement.org

 

[Spock]

For me the major tax hit issue with RMDs is when Married Filing Jointly suddenly becomes filing Single. I was running Mom and Dad's taxes as Dad's dementia started making things too complex for him (rental properties). When Mom died, Dad's taxes doubled. But his living expenses barely budged... same utilities, same property tax, car and home insurance costs etc. The feeling at the time was that the Feds are taxing you for losing your spouse.

 

[harllee]

You can make charitable contributions from your IRA and the amount going to charity reduces your RMD. Problem solved

 

[Winemaker]

I think the aim of some of these videos is the owners of not-so-well funded 401ks and tIRAs. If a million dollar pretax account yields 40-60k in RMDs, not it's not a problem. But the multi-million pretax accounts are a problem especially when one spouse dies.

But if you aren't taking withdrawals from your pretax accounts prior to RMD age, there is more tax deferred monies in those accounts after a 3-5 year extension, making the RMDs larger, creating a larger tax to be paid. And the extra compounding creates a bigger liability for the heirs, considering they have to liquidate after 10 years.

And I get it about paying taxes, you makes the money, you pays the taxes. But they changed the original law twice, and that was after we retired, and planned accordingly for the initial law that was in effect for over 40 years. You can chide that it was never meant to be a wealth preserver, but that's the unintended consequences. The original law said that I must learn to "swim or float" on my own, then after I made my boat, got life jackets, and moved to warmer waters, they poked holes in my boat, ripped my jackets and towed me off the coast of Somalia. There should have been some grandfathering done.

 

[SecondCor521]

Didn't we just discuss this video topic in a different thread?

Nope.

This thread is me griping like a grumpy old man about YouTube personal finance people who try to convince potential clients that having a high net worth and a high income later in life is somehow a Really Bad Situation That You Must Hire Them to Fix.

I don't have a problem with high net worth and high income later in life. I don't have a problem with our progressive tax system.

Yes, of course I can and will do things to optimize.

But the point of this thread is mostly me being annoyed at self-serving marketing. I shouldn't be, because it's a free country with freedom of speech, and these folks are acting in their own rational interest.

This one?

RMD's don't matter?

This guy says most retirees fear of a big tax hit from RMDs is largely unfounded due to changes in RMD rules over the past few years. He discusses how revisions to deduction amounts, tax brackets, RMD starting age and IRS life expectancy tables have combined to significantly reduce the tax...

www.early-retirement.org

The guy in that video (which I didn't watch, just read the title) is saying the opposite of the YouTube video I linked to in the OP. Although they're both probably somewhere between marketing and clickbait.

 

[TheWizard]

For me the major tax hit issue with RMDs is when Married Filing Jointly suddenly becomes filing Single. I was running Mom and Dad's taxes as Dad's dementia started making things too complex for him (rental properties). When Mom died, Dad's taxes doubled. But his living expenses barely budged... same utilities, same property tax, car and home insurance costs etc. The feeling at the time was that the Feds are taxing you for losing your spouse.

Solution is to acquire a replacement spouse ASAP, preferably a destitute one with very little income...

 

[engineernerd]

Hucksterism has always been big in the financial-advice industry. Nothing new there.

But I do fondly remember the days when the internet was young and lots of people posted helpful content of all sorts without trying to "monetize" it.

There are still a few like that, but they seem to be outnumbered these days.

 

[YellowSubmarine]

Hi all.

This has been bugging me for a while now and I am posting to see if I'm missing something. I don't think I am. Also to vent a bit.

I've noticed a trend among some of the personal finance videos who are in their 30s and 40s, as well as some (presumably younger) posters on this board and on other boards talking about the problems with RMDs. Here's one example:

The problem seems to be that when you're older and wealthy, then your RMDs will gradually increase and you'll be taxed more.

I understand pretty well how RMDs work, and how the taxation interacts with pensions and SS and IRMAA.

I also understand how there is a long range tax planning opportunity for early retirees to voluntarily pull from their tax deferred accounts earlier in life (pre-RMD) in order to shift some of those later year higher taxed dollars into earlier lower tax brackets. I know we debate this on the Roth conversion threads regularly, but I think most of us here at least understand the basic idea regardless of our personal stance on the question.

What is bothering me is that I don't really think what they're calling problems are problems. On one hand, they're saying that when you retire it'd be nice to have an increasing income to spend and take care of you and your family's needs and wants, and it'll be so nice to have SS and a pension. And most of us understand that we have a progressive income tax system in the US. What they're calling a bug I mostly see as a feature.

I think the reason they talk about these things as problems (as in the YouTube linked video above) is that they stand to gain from people agreeing with their assertions. I didn't listen to all of it but at the very end of the YT video there seemed to be a call to action to hire them to help you solve these problems. Classic marketing.

It's slightly akin to my parents' estate planning journey. They paid attorneys to write up their initial plan to avoid <problems>. They then paid more money to avoid other <problems>. Then my Mom passed away and my Dad paid more money to an attorney to address <problems> which were partly a result of the prior planning. Now that my Dad is on hospice I can see other <problems> that some attorneys say could be fixed by, you guessed it, more estate planning and legal services.

Maybe I'm just a bit grumpy and stressed. Thanks for reading.

IRAs are a agreement/contract with the IRS and you. Read it and decide if it's for you. No sympathy here. Play by the rules; but first read the rules and avoid these one sided, negative view points from someone that likely failed to do the homework from the get-go. . Or, you just might find yourself unprepared for retirement. imho

 

[TheWizard]

You can make charitable contributions from your IRA and the amount going to charity reduces your RMD. Problem solved

QCDs, checko.
Your RMD amount is unchanged but can be satisfied with a combination of QCDs+ Ordinary Distributions...

 

[cathy63]

My view is that you do what seems right based on your knowledge, the experts' knowledge and the current law. All of those things can and do change, so it's to be expected that you'll have to replan and adapt to new conditions every decade or so. Tweaking your plan multiple times just means you're living a nice long life.

 

[Mark1]

I'm fine with the RMD rules since I have no kids and my goal is to spend it all anyway. Also, I'm not sure anything really changes when DW or I die (and the remaining one of us become Single tax payer instead of MFJ), since the RMD percentage remains basically the same.

Maybe the RMD rules have changed somewhat, but it seems to me the majority of the tax rules have changed to favor us tax payers over my adult life.

 

[engineernerd]

I'm fine with the RMD rules since I have no kids and my goal is to spend it all anyway. Also, I'm not sure anything really changes when DW or I die (and the remaining one of us become Single tax payer instead of MFJ), since the RMD percentage remains basically the same.

Maybe the RMD rules have changed somewhat, but it seems to me the majority of the tax rules have changed to favor us tax payers over my adult life.

The RMD amount stays the same but the tax is higher. According to reports, quite a bit higher.

 

[NomDeER]

As for RMDs, I will try to minimize how much I pay, but I don’t think of it is a problem that I need to solve. For example, if I wanted to avoid RMDs, then I can rollover everything to a Roth and pay the tax. Problem solved, but likely not a good strategy.

That's pretty much just about the labeling that the OP used and the labeling you want to use. The bottom line is that you are trying to reduce the amount of taxes you will pay and maximize how much money you will have over your lifetime. And that's what these videos are discussing. And, of course, they offer their services to help you plan, but you don't have to use them.

The guy in that video (which I didn't watch, just read the title) is saying the opposite of the YouTube video I linked to in the OP. Although they're both probably somewhere between marketing and clickbait.

For the majority of Americans, RMDs are not going to be an issue because they would be using what they pull from their TIRAs/401ks as RMDs anyway or because they don't have enough money saved. The majority of Americans won't even have to consider RMDs in the context of IRMAA or NIIT or higher tax brackets. But, people on this forum aren't typical. For a significant number of people who post on this forum, RMDs could be relatively high and tax planning for RMDs does make sense even though none of us has a crystal ball.

If there is someone here planning for ER, there is a good chance that, like me, they have been told that their taxes are likely to be lower in retirement, and they are therefore making decisions accordingly, even though that may not be true for them. They aren't being told about RMDs, IRMAA, NIIT, etc. Or, they may think that's for super rich people, not them (or their ultimately widowed spouse). But, then there are fearmongers (not just on youtube, but also here on this forum), who will take an extreme position that does not apply to everyone and may not even apply to them.

For any video title that says to worry about RMDs or Roth conversions, you will find the opposite. People need to do their research (which can include watching the videos) and engage in critical thinking to determine what is best for them. Personally, I find some of the youtube videos useful, even if I end up concluding that my situation is different. (And, yet, I have never even considered using the person's services.) Same for comments on this forum, many of which are useful but don't necessarily apply to me.

 

[Al18]

For most on this forum, RMDs are an issue and the taxes need to be managed - that’s why it’s one of top topics here. I’ve found Erin Talks Money channel on YouTube helpful. Her segments are usually about 15 minutes each, but she had an hour segment with Ed Slott about 3 months ago

 

[TheWizard]

For most on this forum, RMDs are an issue and the taxes need to be managed - that’s why it’s one of top topics here. I’ve found Erin Talks Money channel on YouTube helpful. Her segments are usually about 15 minutes each, but she had an hour segment with Ed Slott about 3 months ago

An hour long video is a lot.
Hope there's a transcript to skim...