Apparently, RMDs are a problem now

[junkanoo]

I'm surprised at the number of people that have no interest in minimizing their tax liability. Especially if you are just going to reinvest the money you just paid tax on.
I don't mean going to all extremes to find every loophole and tax avoidance investment, I just mean the simpler thing, like a Roth Conversion.

I'm with that guy /\. All these people that saved for their future now that they are there, they suddenly don't mind paying an additional 10% tax (12% to 22%) on several $10s of thousands of dollars. Now maybe if it's 2% (22% to 24%) it is a little less critical, but still!

As @COcheesehead responded (and this thread is testimony to) Roth Conversions may not be so simple for some.

Besides issues such as IRMAA, Senior Deductions, NIIT etc., many here might have done *much* of their Traditional 401K when they were in the 28% bracket (pre-2017 tax law implementation). So, doing Roth Conversions at 22% is not "an additional 10% tax" but rather a 6% advantage on those dollars.

Another reasonable approach is to figure out the best path forward in a post-2017 tax world. So, yes, if a couple of 64 year-olds with no heirs that are in the 12% marginal tax bracket and decide to go into the 22% bracket to do Roth conversions, when their assignable effective tax rate (as per the videos shared) might be 12 percent - if they simply did the RMDs) and might be 18 percent (at worse) for the remaining widow .... than to borrow from the film The Right Stuff, they may have 'screwed the pooch.'

 

[Al18]

So if the 64 year old couple was expecting a $4M inheritance in the next 4 years, then the Roth IRA conversions would likely be the correct move.

 

[NomDeER]

No capital gains DISTRIBUTIONS, yes.
I presently have a bit over $500k in my growing taxable account, so less than $5000 per year in dividends.
So yes, it helps me stay in my current IRMAA tier and avoid getting further into NIIT territory, for now...

Yes, I understand the "for now" part. For me, it might be better. I'm not just thinking about NIIT and IIRMA but also thinking about beneficiaries who live in a country where dividends are taxed at a higher rate than capital gains. I have far too many unrealized gains in my current investments to sell them. But, it might make good sense to do some of my future investments in one of these low-dividend funds. I'll have to look into it.

 

[Dalton]

Al said: "So if the 64 year old couple was expecting a $4M inheritance in the next 4 years, then the Roth IRA conversions would likely be the correct move."

Not necessarily. If the inheritance is a lot of tax deferred that they have to take large distributions on, then maybe. But, if it's a small IRA, a house, and a brokerage account, they might not need to do conversions.

 

[jazz4cash]

You likely know there's no upper age limit for Roth conversions.
I continue to do small ones after completing my RMD for the year.
My self-imposed limitation is to avoid going from the 24% tax bracket to the 32% bracket with too large conversions.
That would not make financial sense...

How does that work? You satisfy RMD 1st, pay the tax and then convert an additional amount and pay more tax?

 

[TheWizard]

How does that work? You satisfy RMD 1st, pay the tax and then convert an additional amount and pay more tax?

Basically, yes.
Point is to not pay excessive tax, depending on your situation...

 

[junkanoo]

Thanks for posting the follow-up video. Good info.

It's interesting to note in the prior video with the 80 year old couple, there was $0 IRMAA. But as a widow at age 81, Rose will need to start paying IRMAA at age 83.

Sean's latest video shows Blanche, a widow with IRMAA issues caught in that supposed 'Widow's Trap' with a $5 million T-IRA. The big points are that even with doing nothing with a Roth, ever, her effective tax rate is still under 25% (including factoring in a $7,200 IRMAA now for what she will owe in two years). More importantly, her after-tax cash flow is still 250k per year (thus living on 20k per month). Poor Blanche.

He did say he got feedback that some were projecting having large T-IRAs, 20 years out, but .... say a $8.5 million in T-IRA, 20 years out and given inflation, that would still be less than Blanche needs to deal with in real dollars now (4.7M at 3% interest per my calculation). So, Blance's number is quite big in 2026 dollars.

Sean's point being that the fear mongering that some are peddling, ain't true. Sure, Blanche and her husband could have been more optimal, but that's not the point. The point is that they/she did fine without tax optimization (or anything close). Yes, some of her taxes go into the 35% tax bracket (which could be wiped out with a mere 30K QCD), but again, not the true takeaway of the exercise.

In this video, he also addresses the likelihood of some future tax increase, given that most actual voters are in retirement or on the home stretch. He doesn't see politicians working against their own voters and neither do I. Moreover, in his book, he goes through the impressive list of laws passed that have benefited seniors in the last couple of decades.

 

[NomDeER]

Sean's latest video shows Blanche, a widow with IRMAA issues caught in that supposed 'Widow's Trap' with a $5 million T-IRA. The big points are that even with doing nothing with a Roth, ever, her effective tax rate is still under 25% (including factoring in a $7,200 IRMAA now for what she will owe in two years). More importantly, her after-tax cash flow is still 250k per year (thus living on 20k per month). Poor Blanche.

Sean's point being that the fear mongering that some are peddling, ain't true. Sure, Blanche and her husband could have been more optimal, but that's not the point. The point is that they/she did fine without tax optimization (or anything close). Yes, some of her taxes go into the 35% tax bracket (which could be wiped out with a mere 30K QCD), but again, not the true takeaway of the exercise.

There aren't a lot of people with relatively big RMDs (resulting in over $320k annual income) and making substantial IRMAA (and NIIT) payments who aren't going to be "fine." I have never come remotely close to making that kind of money and was fine. Is there anyone who really thinks that people with these incomes are going to be impoverished? Does anyone think these people are going to be eating ramen noodles and living in a hovel? I don't think so. That may be your point, but it's not the point most people here discussing the widow's tax (or being single) are addressing.

Not everyone is going to be in the same situation and have the same income and other considerations. The conversion decision varies widely based on a person's (or couple's) particular situation.

Plus, the majority of people here do want to optimize and that is the point many people make. So, this video doesn't respond to their point. And many here are looking more at what they should do for conversions when in early retirment (not peak earning years like this guy is doing while scoffing at a difference in tax rate of 7 percent per dollar when it may actually be an even bigger difference). This guy does not really compare this person's situation to what would have happened if the couple had converted, so he's not really addressing the point most people here are considering.

 

[Koolau]

I haven't even done a back-of-the-envelope calculation for DW's situation (or, mine I suppose) for when we are no longer a couple - but a single. I'm just thinking that DW's income will take a hit. She'll get my SS but only 1/4 of my modest pension. Plus she will face the loss of her SS, whereupon she will be "hit" with higher taxes as she continues to drain the 401(k) at an ever increasing percentage. Will she survive? Of course. But she just might be in that danger zone of significant loss of income per (the remaining) person.

Now, the way I've set things up, she will have significant back-up with our Roth IRAs. So I should forget about it. Still, it bothers me thinking about a sudden increase in taxes just when income shrinks significantly. I fear that may throw her somehow. YMMV

 

[junkanoo]

snip...

Plus, the majority of people here do want to optimize and that is the point many people make. So, this video doesn't respond to their point. And many here are looking more at what they should do for conversions when in early retirment (not peak earning years like this guy is doing while scoffing at a difference in tax rate of 7 percent per dollar when it may actually be an even bigger difference). This guy does not really compare this person's situation to what would have happened if the couple had converted, so he's not really addressing the point most people here are considering.

Apparently, you just surfed in and are unaware of the other videos that I and others have linked from Sean. He covers the 'to Roth or not' in other videos and if that's not enough covers it very, very specifically in his excellent book. However, the tax calculations in all his videos are quite helpful as they carry through to all proper analysis. And when things aren't 'no-brainers, ' proper calculations and their application are crucial.

The opposite of this is when yet another Financial Advisor shares to the Internet that your spouse is going to be in the 32% tax bracket with RMDs. However, they conveniently don't share that your spouse will also be in the 12% tax bracket with RMDs. Funny how that goes.

https://www.amazon.com/Tax-Planning-Through-Early-Retirement/dp/B0FNNVXY16/ref=sr_1_2_sspa?crid=2LAANWEO6THAF&dib=eyJ2IjoiMSJ9.FxMl-tPkK0S6sufYdnlGAIMUsT0BzgapFVENVCEwQ06t4mRudNOYJ-BFrqUc_sR7rvAf-6snDXLwtkbL29EbuCWlg3BtUcSODRlLSJE3OYwqU6qIoFLUqKoG0m3nJkHhrc2rakOTjS_juoNl3IQIqVhNmlVHjyYJFkAG1vXZHv9k14qTwgVvrivMdIQ4sBvlHUaLfI1iBTkQElT8bLpHri9Lo6bGsH0MqwyA64kPdO0.1xgUsoWpzilEsO3mRUEaAcKvU2Z0Z9IN61G7uWrhaus&dib_tag=se&keywords=taxes+to+and+through+early+retirement&qid=1777383614&sbo=RZvfv%2F%2FHxDF%2BO5021pAnSA%3D%3D&sprefix=taxes+through+%2Caps%2C116&sr=8-2-spons&sp_csd=d2lkZ2V0TmFtZT1zcF9hdGY&psc=1

 

[junkanoo]

I haven't even done a back-of-the-envelope calculation for DW's situation (or, mine I suppose) for when we are no longer a couple - but a single. I'm just thinking that DW's income will take a hit. She'll get my SS but only 1/4 of my modest pension. Plus she will face the loss of her SS, whereupon she will be "hit" with higher taxes as she continues to drain the 401(k) at an ever increasing percentage. Will she survive? Of course. But she just might be in that danger zone of significant loss of income per (the remaining) person.

Now, the way I've set things up, she will have significant back-up with our Roth IRAs. So I should forget about it. Still, it bothers me thinking about a sudden increase in taxes just when income shrinks significantly. I fear that may throw her somehow. YMMV

When income after taxes shrinks significantly, that is a very real concern and your points hit the mark. However, that loss of income will also come with a reduction in expenses too. But, if the husband (first to die) sat at home reading books from the library while she goes to Vegas several times a year along with her golf club membership ... that concern could be easily warranted.

However, chances are it's the husband who had the more expensive lifestyle, as embroidery is unlikely to be as expensive as fishing trips to Mexico or that 1959 Les Paul Standard guitar he was planning on purchasing. She can also unload that vintage guitar collection and turn that into investable cash.

Additionally, her own spending is likely to go down as the years go by. Perhaps at 72, she's getting on planes to visit the grandchildren. At 82, it's more likely that the grandchildren will be visiting her. YMMV.

 

[jerryo]

I'm a little confused by all the QCD discussion.

As noted previously my wife and I (late 60s and mid 70s) are in a higher (35%) tax bracket based solely on our pension and social security income. We also have sizeable TIRAs and post tax savings. We have private health insurance through previous employers so no medicare implications and I think we'll be paying capital gains surcharges regardless of donations. We give substantial amounts to charity (through our DAF) using highly appreciated (about 3,000%) stocks from our after tax savings. I don't think there would be any advantage to making these contributions through QCDs in our circumstances. Is that right?

Perhaps there's a QCD thread we should look at?

 

[RetiredHappy]

I'm a little confused by all the QCD discussion.

As noted previously my wife and I (late 60s and mid 70s) are in a higher (35%) tax bracket based solely on our pension and social security income. We also have sizeable TIRAs and post tax savings. We have private health insurance through previous employers so no medicare implications and I think we'll be paying capital gains surcharges regardless of donations. We give substantial amounts to charity (through our DAF) using highly appreciated (about 3,000%) stocks from our after tax savings. I don't think there would be any advantage to making these contributions through QCDs in our circumstances. Is that right?

Perhaps there's a QCD thread we should look at?

You can turn RMDs into QCDs, thereby reducing taxable income. Basically take QCDs which go to charity instead of RMDs...

 

[junkanoo]

I'm a little confused by all the QCD discussion.

As noted previously my wife and I (late 60s and mid 70s) are in a higher (35%) tax bracket based solely on our pension and social security income. We also have sizeable TIRAs and post tax savings. We have private health insurance through previous employers so no medicare implications and I think we'll be paying capital gains surcharges regardless of donations. We give substantial amounts to charity (through our DAF) using highly appreciated (about 3,000%) stocks from our after tax savings. I don't think there would be any advantage to making these contributions through QCDs in our circumstances. Is that right?

Perhaps there's a QCD thread we should look at?

Key to this is understanding the differences between charitable gifting and a QCD.

Charitable gifting is a below-the-line deduction, thus it has no impact on MAGI but is quite helpful to reduce your tax bill (best used by gifting highly appreciated stocks).

A QCD is an above-the-line distribution/offset (not a deduction). This is best used for charitable gifting when the goal is to reduce your T-IRA balance and offset your RMDs. Used effectively, QCDs can lower or even zero out someone's RMDs, thus reducing MAGI (from what it *could* have been) thus helping with IRMMA and Net Investment Income Tax (NIIT) calculations (along with high tax rate brackets).

Conventional wisdom is to use charitable gifting when it's the only game in town (for those that are first and foremost charitably minded) and to switch to QCDs after turning 70 1/2 (or when RMDs start).

Those that are charitably minded but in the highest tax brackets and capped off by the ceiling of allowable QCDs per year *might* consider using both approaches at the same time.

 

[TheWizard]

I watched the most recently linked video.
Sean was purposefully trying to examine the worst case scenario for Blanche by not having her do QCDs or other significant contributions. I sort of understand that.

What was annoying was his fascination with her $249k gross income, which is apparently so big that it will be hard to spend it all.

A better approach is to be planning to be Good Custodians of your financial assets and income streams from start of retirement on, by doing proper financial planning. Too broad a topic to elaborate further here...

 

[TheWizard]

...Conventional wisdom is to use charitable gifting when it's the only game in town (for those that are first and foremost charitably minded) and to switch to QCDs after turning 70 1/2 (or when RMDs start)...

Correct.
QCDs are only doable from tIRAs, not employer tax-deferred plans. Some folks may want to do rollovers to increase the RMD amount due from their tIRA...

 

[RetiredHappy]

What was annoying was his fascination with her $249k gross income, which is apparently so big that it will be hard to spend it all.

I didn't watch the video, but our income is above $249K gross each year in retirement and it is not that big at all. After paying for bills, I don't have anything left for "spendy" stuff for myself. I have been eyeing this piece of jewelry and cannot get myself to buy it. Of course if I mention it to my husband, he will buy it for me without second thoughts.

 

[TheWizard]

I think the point I was beating around the bush at in #240 is that you can only do financial planning for this year and future years. There's nothing to be done about 2025 and earlier at this point.

A question for the 81 year old widow, for the purpose of educating younger folks, might be: what was your financial plan back at age 61?

And there's nothing wrong with being in the 35% Federal tax bracket in retirement, especially if you've been there since the day you retired.
But if you were in the 22-24% bracket for first decade of retirement and bumped up to 35% bracket due to predictable circumstances, then it might be a bit annoying...

 

[junkanoo]

I watched the most recently linked video.
Sean was purposefully trying to examine the worst case scenario for Blanche by not having her do QCDs or other significant contributions. I sort of understand that.

What was annoying was his fascination with her $249k gross income, which is apparently so big that it will be hard to spend it all.

A better approach is to be planning to be Good Custodians of your financial assets and income streams from start of retirement on, by doing proper financial planning. Too broad a topic to elaborate further here...

Her gross income was $329k. The $249K is her Income after Federal Taxes and includes NIIT and IRMAA penalties. I'm not sure where that puts her among 81 year-old widows, but I'd venture a guess at how long the line would be for those queuing up to take that deal (not to mention the $6 million in invested assets with no mortgage).

As you stated, his plan was to show what the outcome would be if they were strictly passive and just paid the applicable taxes thus stress-testing that outcome. As he mentioned, if they/she had come to him and asked him for a plan, that wouldn't have been it.

"A better approach is to be planning to be Good Custodians of your financial assets and income streams from start of retirement on, by doing proper financial planning. Too broad a topic to elaborate further here..."

Absolutely!!!

 

[pb4uski]

I'm a little confused by all the QCD discussion.

As noted previously my wife and I (late 60s and mid 70s) are in a higher (35%) tax bracket based solely on our pension and social security income. We also have sizeable TIRAs and post tax savings. We have private health insurance through previous employers so no medicare implications and I think we'll be paying capital gains surcharges regardless of donations. We give substantial amounts to charity (through our DAF) using highly appreciated (about 3,000%) stocks from our after tax savings. I don't think there would be any advantage to making these contributions through QCDs in our circumstances. Is that right?

Perhaps there's a QCD thread we should look at?

When you become eligible to do QCDs at 70-1/2 I think that they will be more beneficial to you and particularly so once you are subject to RMDs.

You can use QCD's to satisfy RMDs. Let's say an extreme is that you do all your RMD with QCD's... you meet your RMD requirement at a tax cost of $0. At the same time, you are not selling highly appreciated taxable account assets that will likely get a stepped up basis when you pass.

 

[MarieIG]

I'm a little confused by all the QCD discussion.

As noted previously my wife and I (late 60s and mid 70s) are in a higher (35%) tax bracket based solely on our pension and social security income. We also have sizeable TIRAs and post tax savings. We have private health insurance through previous employers so no medicare implications and I think we'll be paying capital gains surcharges regardless of donations. We give substantial amounts to charity (through our DAF) using highly appreciated (about 3,000%) stocks from our after tax savings. I don't think there would be any advantage to making these contributions through QCDs in our circumstances. Is that right?

Perhaps there's a QCD thread we should look at?

With a large traditional IRA and a high tax bracket, if you are charitably inclined QCDs, can provide significant advantages.

For example, if someone is more than 70 1/2 they would be able to donate up to 111,000 this year to a qualified charity. Typically when removing funds from a traditional IRA that sum would be subject to income tax. When making a proper QCD, those funds would not be subject to tax.

So, maybe one might consider starting their yearly donation with a QCD, and when tapped out on what is allowable, donate appreciated stock. One can titrate when to sell or donate stock, however, when RMDs kick in, there comes a time when funds must be taken from the TIRA.

 

[junkanoo]

When you become eligible to do QCDs at 70-1/2 I think that they will be more beneficial to you and particularly so once you are subject to RMDs.

You can use QCD's to satisfy RMDs. Let's say an extreme is that you do all your RMD with QCD's... you meet your RMD requirement at a tax cost of $0. At the same time, you are not selling highly appreciated taxable account assets that will likely get a stepped up basis when you pass.

I'll play Devil's Advocate on that last point (I agree with your other points). What comes with highly appreciated taxable stocks (note: @jerryo is referring to 30-baggers) is being overweight on that stock (and perhaps the category). So ... is it worth the risk being overweight on something that could wither away in the 15 years to get that lovely step-up? Because, that Shopify (for example) price loss would make tax considerations a secondary factor. So, someone could (1) simply pay the 15 or 20% in LTCG (or more if they are in IRMMA/NIIT jail) to rebalance or (2) gift the highly appreciated shares. For @jerryo - who would get a deduction of 30+ cents on every dollar gifted (and avoid NIIT/IRMAA in the process) ... that's not a bad way to be both charitable and help with the rebalance problem.

 

[Koolau]

Key to this is understanding the differences between charitable gifting and a QCD.

Charitable gifting is a below-the-line deduction, thus it has no impact on MAGI but is quite helpful to reduce your tax bill (best used by gifting highly appreciated stocks).

A QCD is an above-the-line distribution/offset (not a deduction). This is best used for charitable gifting when the goal is to reduce your T-IRA balance and offset your RMDs. Used effectively, QCDs can lower or even zero out someone's RMDs, thus reducing MAGI (from what it *could* have been) thus helping with IRMMA and Net Investment Income Tax (NIIT) calculations (along with high tax rate brackets).

Conventional wisdom is to use charitable gifting when it's the only game in town (for those that are first and foremost charitably minded) and to switch to QCDs after turning 70 1/2 (or when RMDs start).

Those that are charitably minded but in the highest tax brackets and capped off by the ceiling of allowable QCDs per year *might* consider using both approaches at the same time.

Great summery.

We are considering QCDs this year. We have only 401(k) as our qualified money. In our case we will need to open tIRA(s) and fund them from the 401(k) before we can use QCDs. Previously, we did "below the line" charitable giving. That has now put us too close to the "cliffs" such as IRMAA and maybe even NIIT - depending. So I need to get busy and get set up with tIRAs to do the deed.

 

[TheWizard]

Exactly.
I think you're beyond RMD start age, so you'll need to complete your 401(k) RMD for 2026 before you can rollover a portion of that to a tIRA. I've been doing this the past few years from my 403(b).

And while you can do a QCD from your newly funded tIRA this year, it won't offset any RMD regular distributions until next year.
Cheers...

 

[jazz4cash]

I think the point I was beating around the bush at in #240 is that you can only do financial planning for this year and future years. There's nothing to be done about 2025 and earlier at this point.

A question for the 81 year old widow, for the purpose of educating younger folks, might be: what was your financial plan back at age 61?

And there's nothing wrong with being in the 35% Federal tax bracket in retirement, especially if you've been there since the day you retired.
But if you were in the 22-24% bracket for first decade of retirement and bumped up to 35% bracket due to predictable circumstances, then it might be a bit annoying...

The “problem” is so many folks don’t understand how taxes work so they think their entire income is being taxed at 35 (or whatever) %. They are vulnerable to trolls on the web and other media