Apparently, RMDs are a problem now

[Andre1969]

I have three inherited IRAs, and it's been a bit of an eye opener, seeing how fast they can grow, even with RMDs.

The first one, I inherited from my Grandmom back in 2015, at the age of 45. I had to take the first RMD in 2016, and the RMDs were tied to my own life expectancy at the time, which they estimated to be 84. It's currently worth about 38% more, despite those RMDs. And despite putting most of it into a biotech fund that did poorly, for a few years.

I inherited the second one from my Dad in 2017. It's also designed to completely deplete the year I turn 84. And, despite the RMDs, it's up about 73.5%.

In late 2023, I inherited yet another one, from my uncle. This one is subject to the 10 year rule, so it has to be completely depleted by the end of 2033. The Fidelity rep that helped me transfer the IRA recommended that, if I was planning to retire in the near future, hold off on taking RMDs until after I retired, to help with taxes. So, I withdrew nothing for 2024. For 2025, I withdrew 1/9th of the starting value for that year, spread out over 12 months. For 2026, I was going to bump it up to 1/8th. However, I'm selling a house this year, and am going to end up with a good deal of capital gains, so I kept it as-is. And then, once the house sells, I'm planning to suspend the RMDs for the remainder of the year, picking up again in 2027. That one's still up about 29%, even with the accelerated RMDs, compared to the "Deplete by 84 plan" that my other two IRAs are on.

So, I guess I could call those rising balances and RMDs a problem. But there are worse problems to have.

 

[Exchme]

I have three inherited IRAs, and it's been a bit of an eye opener, seeing how fast they can grow, even with RMDs.

The first one, I inherited from my Grandmom back in 2015, at the age of 45. I had to take the first RMD in 2016, and the RMDs were tied to my own life expectancy at the time, which they estimated to be 84. It's currently worth about 38% more, despite those RMDs. And despite putting most of it into a biotech fund that did poorly, for a few years.

I inherited the second one from my Dad in 2017. It's also designed to completely deplete the year I turn 84. And, despite the RMDs, it's up about 73.5%.

In late 2023, I inherited yet another one, from my uncle. This one is subject to the 10 year rule, so it has to be completely depleted by the end of 2033. The Fidelity rep that helped me transfer the IRA recommended that, if I was planning to retire in the near future, hold off on taking RMDs until after I retired, to help with taxes. So, I withdrew nothing for 2024. For 2025, I withdrew 1/9th of the starting value for that year, spread out over 12 months. For 2026, I was going to bump it up to 1/8th. However, I'm selling a house this year, and am going to end up with a good deal of capital gains, so I kept it as-is. And then, once the house sells, I'm planning to suspend the RMDs for the remainder of the year, picking up again in 2027. That one's still up about 29%, even with the accelerated RMDs, compared to the "Deplete by 84 plan" that my other two IRAs are on.

So, I guess I could call those rising balances and RMDs a problem. But there are worse problems to have.

Since inherited IRAs have the fewest years of tax protection of the various tax preferenced accounts, (10 year rule ones are the worst), the most tax efficient approach is to preferentially put your bonds/fixed income there. That leaves space in accounts that are better shielded from taxes for your stocks.

For us, taxable is the best place for stocks as growth will be taxed as capital gains if sold or never taxed if we die without selling. For our situation the order for where stocks should go is:
Taxable, Roth, t-IRA, stretch inherited IRAs, 10-year inherited IRAs.

 

[Diogenes]

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 .

While of course you're quite right, it merits repeating, that "we" are better off than the vast majority of folks, not because we found gold with a metal detector on the beach, or guessed the right door on a game-show, or were rewarded by an eccentric rich uncle, but because we deliberately eschewed consumption in favor of saving, and invested those savings wisely. We're better off because we ourselves put in the effort and acceded to the risk. We could have chosen otherwise, in which case, we'd have less money left over, and less... to be taxed.

My objection to the various media outlets, be it influencers or you-tube or "experts" interviewed on financial shows, or any such, isn't that these folks are wrong, or that their remarks are self-serving. It's that the core problem is never addressed: our tax code relentlessly and cruelly penalizes thrift. Most of these tax-management strategies are just rearranging the proverbial deck-chairs.

 

[COcheesehead]

Why do I get the feeling that some people think an RMD has to be spent. It’s a transfer of wealth from a tax deferred to a taxable account with the need to pay taxes on the withdrawal. It can be used for anything after that including being reinvested.

 

[Time2]

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

But if you make more money (retirement income) than you spend, you just have to reinvest it after tax. We live just inside the 12% tax bracket, and about 1/2 of that has been reinvested with Roth conversions. Started SS last year, With dividends from our taxable accounts, that is enough income. I need to reduce my Tax deferred accounts before they start adding unwanted income thru RMDs. And even more so after I die and my wife files single.

 

[Gumby]

Why do I get the feeling that some people think an RMD has to be spent. It’s a transfer of wealth from a tax deferred to a taxable account with the need to pay taxes on the withdrawal. It can be used for anything after that including being reinvested.

It's the result of decades of propaganda that taxes are somehow evil. I say no they are not, and stand with U.S. Supreme Court Justice Oliver Wendell Holmes, Jr. "Taxes are what we pay for civilized society...." Compania General de Tabacos v. Collector, 275 U.S. 87,100 (1927).

 

[Time2]

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.

 

[COcheesehead]

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.

Lot of hitches with a conversion. For some it’s not that simple. ACA, IRMAA, already in a higher bracket, lots of moving parts.

 

[Dtail]

Since inherited IRAs have the fewest years of tax protection of the various tax preferenced accounts, (10 year rule ones are the worst), the most tax efficient approach is to preferentially put your bonds/fixed income there. That leaves space in accounts that are better shielded from taxes for your stocks.

For us, taxable is the best place for stocks as growth will be taxed as capital gains if sold or never taxed if we die without selling. For our situation the order for where stocks should go is:
Taxable, Roth, t-IRA, stretch inherited IRAs, 10-year inherited IRAs.

I am curious why you put Taxable before Roth, or is it that your Roth is already filled up with equities?

 

[pb4uski]

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.

How is it a problem IF the effective tax rate that that you are paying on withdrawals is less than the effective tax savings when you deferred that income?

That is still the case for many/most people since tax rates have declined... what a decade ago was the 28% is now 24% so a 4% decreae and 3% decreases for the two lower tax brackets PLUS many people move to low or no state tax states once they retire so there are tax saving there as well (6% in my case).

You nailed it... "The core problem is psychological." People only think about what they are paying on today's withdrawals and what they saved back when the made those tax deferred contibutions are long forgotton.

It's almost like they think that they should be able to make those withdrawals tax-free and they conveniently forget that they never paid tax on either those deductible contributions or on employer matches or on the growth.

And its not a bad problem to have, no?

 

[pb4uski]

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)

Under current law, non-spouse inherited IRAs have to be cleaned out within 10 years, so it may not be as long as you are thinking.

 

[audreyh1]

How is it a problem IF the effective tax rate that that you are paying on withdrawals is less than the effective tax savings when you deferred that income?

That is still the case for many/most people since tax rates have declined... what a decade ago was the 28% is now 24% so a 4% decreae and 3% decreases for the two lower tax brackets PLUS many people move to low or no state tax states once they retire so there are tax saving there as well (6% in my case).

You nailed it... "The core problem is psychological." People only think about what they are paying on today's withdrawals and what they saved back when the made those tax deferred contibutions are long forgotton.

It's almost like they think that they should be able to make those withdrawals tax-free and they conveniently forget that they nevr paid tax on either those deductible contributions or on employer matches or on the growth.

And its not a bad problem to have, no?

For a while in the later 80s there was a “surcharge” in one of the middle tax brackets and I was actually paying 31% federal taxes on some of my income. A very odd situation, but at least I was investing much as allowed in the 401K.

 

[pb4uski]

..."Taxes are what we pay for civilized society...." Compania General de Tabacos v. Collector, 275 U.S. 87,100 (1927).

While I agree, at the same time I wonder if the value proposition is slipping away.

 

[Gumby]

While I agree, at the same time I wonder if the value proposition is slipping away.

Well, I wasn't going to say anything about the rest of you heathens.

 

[Exchme]

I am curious why you put Taxable before Roth, or is it that your Roth is already filled up with equities?

I thought it plausible that Roth would come out ahead, so tested it both ways using Pralana and putting stocks preferentially in taxable came out ahead vs. putting them in Roth. I presume because putting bonds in taxable creates a lot of annual tax drag.

 

[audreyh1]

Under current law, non-spouse inherited IRAs have to be cleaned out within 10 years, so it may not be as long as you are thinking.

Unless the heir is less than 10 years younger, then the old lifetime rules apply.

 

[audreyh1]

Why do I get the feeling that some people think an RMD has to be spent. It’s a transfer of wealth from a tax deferred to a taxable account with the need to pay taxes on the withdrawal. It can be used for anything after that including being reinvested.

I think some folks are simply using their IRAs to fund current expenses and leaving their taxable assets alone.

 

[pb4uski]

I think some folks are simply using their IRAs to fund current expenses and leaving their taxable assets alone.

Do you mean that money is fungible?

 

[marko]

Under current law, non-spouse inherited IRAs have to be cleaned out within 10 years, so it may not be as long as you are thinking.

Right. So my own ira could last me another 15-20 years. Then young DW inherits it as a spousal and it lasts another 10 years and then nephew has another 10 years to deplete it.

Heck, DW could marry the 25 year old pool boy and keep that ball rolling for an extra 60 years after that!

IIRC, my first dollar was put into a 401k around 40 years ago.

 

[TheWizard]

Do you mean that money is fungible?

Fungible to a degree, definitely.
I have two RMDs to manage:
RMD from my 403(b) goes to my checking account quarterly where it commingles with SS and pension/annuity monthly income.
RMD from my tIRA is mostly targeted for QCDs.

I do move excess funds from checking to my taxable investment account most months unless a major expense is pending...

 

[old medic]

If we get to a place where RMDs become a problem, the biggest problem is there is only one of us....

 

[OK EE]

DW and I don't have kids so no legacy goals. Odds are if we're even in the middle as far as market returns goes we're going to have so much money by RMD age we'll never run out even paying 50% taxes. That said:

We're targeting staying in the 24% terminal tax rate bracket since that's where we've mostly lived during our working years. We're going to do low hanging fruit conversions during our low tax years, probably filling the 12% bracket, which software shows us staying 24% tax rate lifetime in most situations. Doing more conversions is actually worse as far as total dollars available.

Roth conversions are a two edged knife. They sound great until you run the simulations and realize doing more means getting less. I think people need to be much more conservative in conversions. Worst case on underconverting is far better than worst case overconverting.

 

[TickTock]

It's that the core problem is never addressed: our tax code relentlessly and cruelly penalizes thrift.

I'm not seeing it. If Smith and Jones have the same income, but Smith spends all he makes while w*rking and Jones saves some, then their initial taxes are either equal (if Jones save in taxable accounts or Roths) or less (if savings are tax-deferred, for example, in a 401(k). Subsequently, Jones' taxes are less than Smith's would be if their incomes were the same - by any unrealized capital gains and qualified dividends in taxable, anything in a Roth, and tax-deferred gets to sit around untaxed for years or decades while new deposits continue to lower Jones' taxes vs. Smith's. Sure, tax-deferred funds eventually get taxed as ordinary income, but it's still no worse than a high earner who doesn't save.

 

[Koolau]

I have three inherited IRAs, and it's been a bit of an eye opener, seeing how fast they can grow, even with RMDs.

The first one, I inherited from my Grandmom back in 2015, at the age of 45. I had to take the first RMD in 2016, and the RMDs were tied to my own life expectancy at the time, which they estimated to be 84. It's currently worth about 38% more, despite those RMDs. And despite putting most of it into a biotech fund that did poorly, for a few years.

I inherited the second one from my Dad in 2017. It's also designed to completely deplete the year I turn 84. And, despite the RMDs, it's up about 73.5%.

In late 2023, I inherited yet another one, from my uncle. This one is subject to the 10 year rule, so it has to be completely depleted by the end of 2033. The Fidelity rep that helped me transfer the IRA recommended that, if I was planning to retire in the near future, hold off on taking RMDs until after I retired, to help with taxes. So, I withdrew nothing for 2024. For 2025, I withdrew 1/9th of the starting value for that year, spread out over 12 months. For 2026, I was going to bump it up to 1/8th. However, I'm selling a house this year, and am going to end up with a good deal of capital gains, so I kept it as-is. And then, once the house sells, I'm planning to suspend the RMDs for the remainder of the year, picking up again in 2027. That one's still up about 29%, even with the accelerated RMDs, compared to the "Deplete by 84 plan" that my other two IRAs are on.

So, I guess I could call those rising balances and RMDs a problem. But there are worse problems to have.

IIRC nothing prevents you taking more than the RMDs if you want to deplete the balances faster. I've been doing that for years with my 401(k). I've been doing so to prevent the 401(k) balance from growing too much and eventually having my RMDs push me over cliffs. Of course, my 401(k) has STILL continued to grow even faster than I can deplete it. Again, I guess it's a good problem to have.

 

[TheWizard]

I'm not seeing it. If Smith and Jones have the same income, but Smith spends all he makes while w*rking and Jones saves some, then their initial taxes are either equal (if Jones save in taxable accounts or Roths) or less (if savings are tax-deferred, for example, in a 401(k). Subsequently, Jones' taxes are less than Smith's would be if their incomes were the same - by any unrealized capital gains and qualified dividends in taxable, anything in a Roth, and tax-deferred gets to sit around untaxed for years or decades while new deposits continue to lower Jones' taxes vs. Smith's. Sure, tax-deferred funds eventually get taxed as ordinary income, but it's still no worse than a high earner who doesn't save.

Additionally, the very wealthy (Deca- millionaires and above) will generally have the bulk of their assets in a taxable account where Qdivs and LTCGs are taxed at maybe 15%, which is a lot lower than high income W-2 employees...