Apparently, RMDs are a problem now

[athena53]

When you are young and poor it is easy to imagine that you'll have a lower tax rate in retirement than you will while working. Once you have built substantial tax-deferred wealth it is something that needs to be re-evaluated annually but often is just blind fully continued.

Well, that was the conventional wisdom when I was working (1975-2014). You also got the company match only in the 401(k) and Roths were an option only late in my career. I wish I'd known that withdrawals would be taxed as ordinary income and possibly trigger IRMAA surcharges and that RMD laws would be enacted- but I didn't. I might have kept the same allocation of contributions just to get the company match, which was 100% of the first 6% most of my career.

I think I've made peace with my tactics for this year (turned 73 in February). Most of my RMDs will be QCDs (just sent $11,000 out with another $5,000 to come) and I know I'll have to pay taxes on the portion that won't be QCDs. I can also take the standard deduction since my other possible itemized deductions are well below that threshold. The IRMAA situation is tricky, though. One of my mutual finds declared a substantial capital gains distribution very late in December with no prior estimate available on their web site, making it hard to guess at my AGI for the year. Will have to monitor that more closely this year.

 

[Dalton]

The current structure of RMDs is rather silly imo.

To cover living expenses, I've been withdrawing much more from my IRA than my RMD amount, ever since I turned 59.5. My calculators say this will continue for at least another 10 years until I'm about 85.

Rather than depleting my IRA, the balance is now 2X, so the whole thing isn't working as far as I'm concerned. What's the point?

If you live long enough it will work better. At 94, your RMD will be more than 10% of your total, and at 99 it will almost 15%. They probably chose not to ramp it any faster, because it would be pretty bad if you took a sequence of returns hit in your early 90s, and you didn't have enough to live on from 97 to 102.

 

[Al18]

Interesting study of RMD's for a couple age 80 with a $2M Traditional IRA

 

[SecondCor521]

The problem with RMDs is that too few people properly assess whether it makes sense to do tax deferred savings at the time that they do it.

When you are young and poor it is easy to imagine that you'll have a lower tax rate in retirement than you will while working. Once you have built substantial tax-deferred wealth it is something that needs to be re-evaluated annually but often is just blind fully continued.

If so I was still working it wouldn't make sense to defer income that would be taxed at 22% if I expected that future withdrawals would be taxed at more than 22%.

I've been advising my young adult offspring to do Roth until the taxes become painful and then switch to traditional if it makes sense. All three have significant Roth and taxable and little in traditional. For them the tradeoff is probably somewhere above the 22% bracket.

Late to this thread, didn't read it all, didn't click the video. OP's initial premise was being "grumpy" about videos like this, and specifically about influencers promoting these kinds of videos, especially on a subject that can go either way.

One thing I want to point out about videos like this is that these influencers, or whatever, frequently have bot armies or alter-egos that post among various forums to both agree and disagree. Agitation boils the water and gets them clicks. That's why I didn't click it.

BTW, OP is long time here so I'm not saying he is part of an "astroturfing" army (a reddit phrase). But beware out there. Thankfully, our mods do an incredible job keeping this kind of nonsense out of here.

I don't mind marketing and promotion, even the agitated variety. What I dislike is the dishonesty or misrepresentation. Large RMDs - said another way a lot of income in retirement - is what people should want. I agree the forced aspect of RMDs is a drawback, but RMDs themselves are not a problem in my view.

 

[marko]

Um, because your IRA maybe would be 3x or 4x instead?

Sure, but I'm still going to leave a bundle! And then it becomes a spousal inherited IRA and maybe inherited 1 or 2 more times after that....growing and growing.

If the goal is for the government to get as much of the taxes I've been deferring for the last 45 years, they're failing horribly. Why not goose the percentage?

 

[marko]

When you are in the position that you have more than you need, its interesting that the seemingly next important thing is to make sure Uncle Sam aint getting it.

pwf

Well, that's a piece of how you ended up with "more than you need"

 

[pb4uski]

Well, that was the conventional wisdom when I was working (1975-2014). You also got the company match only in the 401(k) and Roths were an option only late in my career. I wish I'd known that withdrawals would be taxed as ordinary income and possibly trigger IRMAA surcharges and that RMD laws would be enacted- but I didn't. I might have kept the same allocation of contributions just to get the company match, which was 100% of the first 6% most of my career.

I think I've made peace with my tactics for this year (turned 73 in February). Most of my RMDs will be QCDs (just sent $11,000 out with another $5,000 to come) and I know I'll have to pay taxes on the portion that won't be QCDs. I can also take the standard deduction since my other possible itemized deductions are well below that racketthreshold. The IRMAA situation is tricky, though. One of my mutual finds declared a substantial capital gains distribution very late in December with no prior estimate available on their web site, making it hard to guess at my AGI for the year. Will have to monitor that more closely this year.

RMDs were enacted in 1986, so they have been around a long time.

Perhaps a more reasonable vantage point is to compare the tax rate on RMDs with the tax rate when the tax deferrals were made. In my case, a lot of my career was in the 28% tax bracket so that would have been the savings on 401k contributions. On top of that, I was in 6% state tax bracket.

So for my contributions, I saved ~34%. So if I pay 22% on RMDs then I'm still way ahead.

 

[FIYes]

RMDs start for DH this and for me next year. Yes, we will be withdrawing more than we otherwise might, but it is a good problem to have.

 

[MichaelB]

I've been advising my young adult offspring to do Roth until the taxes become painful and then switch to traditional if it makes sense. All three have significant Roth and taxable and little in traditional.

I’ve done the same with my children and (thankfully) they are in a similar situation.

RMDs themselves are not a problem in my view.

Exactly. They are just the opposite, a sign of achievement.

 

[Dtail]

RMDs were enacted in 1986, so they have been around a long time.

Perhaps a more reasonable vantage point is to compare the tax rate on RMDs with the tax rate when the tax deferrals were made. In my case, a lot of my career was in the 28% tax bracket so that would have been the savings on 401k contributions. On top of that, I was in 6% state tax bracket.

So for my contributions, I saved ~34%. So if I pay 22% on RMDs then I'm still way ahead.

Yep.
I have stated this concept before. It is a concept that many folks don't take into account and just concentrate on current marginal rates. It gives me more satisfaction in not just concentrating on Roth conversions and/or getting more upset that I can't do more conversions.

 

[Winemaker]

While I have converted 90% of DW's 403b and tIRA, I have a long way to go to get mine down. We have been taking withdrawals from my accounts since 2014 when we retired, growth, divvies and interest have increased the original balances. I have several tIRAs, and one 401k. If I go room temperature, DW will have the option to refuse acceptance and pass on to to the kiddos, who are secondary. She won't get hit as hard with the "widow's tax" then and the kiddos will get some green early. That is, unless we both go together, like Thelma and Louise!

When RMDs hit my accounts in 5+years, we will clearly still be in the 24% bracket, at 15.90% effective. I am trying to keep the balance at about $2M, that way RMDs will be about what we're withdrawing now. That's my optimazation problem.

Someone who only has a $30k RMD, RMDs are not an optimization problem.

 

[TickTock]

If you were born in 1960 or later, RMDs start at 75. That gives a nice window of 65-74 when no ACA MAGI management is needed to convert. It's also a factor in tipping the SS claiming decision to later instead of sooner.

 

[stepford]

If you were born in 1960 or later, RMDs start at 75. That gives a nice window of 65-74 when no ACA MAGI management is needed to convert. It's also a factor in tipping the SS claiming decision to later instead of sooner.

Agreed, but that 65-74 window is also the period when conversions can push one into significantly higher IRMAA tiers.

 

[TickTock]

Absolutely! I... intensely dislike... any situation where earning another $1 can cost you more than $1 - and in these cases,*significantly* more than $1. It just feels wrong that more earnings result in less money for the earner.

 

[Slim11]

I think part of the problem with roth and Defered comp IRA plans is that the componies are selling the roth as the best and only option. The guy who replaced me when I retired is single, rents, were in nj, he makes 220 to 250ish with OT. He gets killed on taxes as they talked him into a roth instead of utilizing the deferred comp plan. Maybe they brokerages make a little more pushing them? IDK.

 

[audreyh1]

The current structure of RMDs is rather silly imo.

To cover living expenses, I've been withdrawing much more from my IRA than my RMD amount, ever since I turned 59.5. My calculators say this will continue for at least another 10 years until I'm about 85.

Rather than depleting my IRA, the balance is now 2X, so the whole thing isn't working as far as I'm concerned. What's the point?

That’s probably because you have high growth assets in your IRA that is outpacing withdrawals. I guess if that’s the only place to have them as opposed to a Roth IRA or taxable account, then you are kind of stuck with the situation.

 

[audreyh1]

Well, that was the conventional wisdom when I was working (1975-2014). You also got the company match only in the 401(k) and Roths were an option only late in my career. I wish I'd known that withdrawals would be taxed as ordinary income and possibly trigger IRMAA surcharges and that RMD laws would be enacted- but I didn't. I might have kept the same allocation of contributions just to get the company match, which was 100% of the first 6% most of my career.

I think I've made peace with my tactics for this year (turned 73 in February). Most of my RMDs will be QCDs (just sent $11,000 out with another $5,000 to come) and I know I'll have to pay taxes on the portion that won't be QCDs. I can also take the standard deduction since my other possible itemized deductions are well below that threshold. The IRMAA situation is tricky, though. One of my mutual finds declared a substantial capital gains distribution very late in December with no prior estimate available on their web site, making it hard to guess at my AGI for the year. Will have to monitor that more closely this year.

IRMAA only went into effect in 2007. It didn’t exist for us in our earlier tax-deferred savings years.

 

[Exchme]

He gets killed on taxes as they talked him into a roth instead of utilizing the deferred comp plan.

For me, the big downside of the deferred comp plan was that I would become an unsecured creditor of the company. The industry I work in has had more than one bankruptcy and I wasn't willing to risk it.

I hadn't considered the scenario that actually bit some friends - they went the deferred comp route and then when work politics became unmanageable, they quit the company and went to work elsewhere. But their deferred comp payments kicked in on top of their new salaries, so they were in far worse shape with taxes than if they had done nothing.

 

[Diogenes]

The core problem is psychological. If you spend a professional-lifetime earning well, saving aggressively and spending meagerly, then you might conceivably arrive at age 72 deeply into the much-vaunted top 1% or, perhaps even top 0.1%. But you're still shopping at Good Will and viewing a double-hamburger at Denny's as an exotic treat. Yes? Then your RMDs and other taxes are substantially larger than all of your other spending combined. That's a realization that hurts, isn't it?

No you-tuber is going to solve that problem. But please let's not delude ourselves: it's still a problem.

 

[marko]

That’s probably because you have high growth assets in your IRA that is outpacing withdrawals. I guess if that’s the only place to have them as opposed to a Roth IRA or taxable account, then you are kind of stuck with the situation.

I think the one who's "stuck" is the IRS as they'll never be able to recover all my tax deferred gains.

 

[audreyh1]

I think the one who's "stuck" is the IRS as they'll never be able to recover all my tax deferred gains.

Oh they will, unless your IRA goes to charity.

 

[jollystomper]

I am not tempted to see RMDs, or the additional taxes or IRMAA that will be due for us, as a problem, when I consider:
- Much of my income was deferred in years when our federal and state tax rates were higher.
- It was not just my income that went into my 401K, I received a very good company match over the years (and an accelerated match that last 10 years, which contributed to the "problem").
- I have a pension, but with all the Megacorp pension changes I am glad to have had another vehicle in case my pension was severely impacted (it was impacted some, but is still at a good level)
- I have very nice growth for now over 40+ years in my 401K, during probably one of the best long term market periods in history. When the company match is factored in, in many market down years my 401K growth was still up for the year.
- Based on my current estimates, our "worst case" is having, after taxes, about 71% of our RMD to spend, invest, or give away as we desire after federal and state taxes (and perhaps even more if by that time we choose to move to another state).

So yeah, while I am not turning cartwheels and feeling rainbows and unicorns over having to pay more taxes and Medicare, I am not looking for sympathy around this issue. It will still leave us better off, and with more options, than many, many, many others .

 

[marko]

Oh they will, unless your IRA goes to charity.

My RMD is about 3.7%. It's about 8% at age 90. My gains average 8-9%. Sounds like a poorly planned policy to me. If they really wanted those taxes they should be setting my RMD to 10% today.

Between my longevity and DW being much younger, and a subsequent 3rd level inherited IRA for someone after she passes, it could be another 40 or 50 years before it gets fully cleaned out. Almost 80-90 years since I put that first dollar in there.

I hope they're patient. (I know they are)

 

[TheWizard]

My RMD is about 3.7%. It's about 8% at age 90. My gains average 8-9%. Sounds like a poorly planned policy to me. If they really wanted those taxes they should be setting my RMD to 10% today.

Between my longevity and DW being much younger, and a subsequent 3rd level inherited IRA for someone after she passes, it could be another 40 or 50 years before it gets fully cleaned out. Almost 80-90 years since I put that first dollar in there.

I hope they're patient. (I know they are)

50-80 years is a long time for you or me, but not so long for The Government.

I think the low RMD percentages, starting around 3.7% as you say, are a variation on the 4% SWR rule of thumb for those who need their tax-deferred money to live on till age 95+.

And I think The Government would be quite pleased that some of us invest our tax-deferred assets in stock funds that grow 10% per year on average. That allows EVEN MORE taxes to be extracted from that account over time...

 

[Koolau]

The fact of RMDs requires significant planning when saving and between FIRE and MC. Roth conversions can help but recent run-ups in equities have placed many of us in a situation where our RMDs are higher than we ever expected - despite all our planning. I guess that's actually good but it fells bad to pay more taxes and IRMAA. YMMV