Apparently, RMDs are a problem now

[athena53]

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

Which enforces my point that it's dicey to decide when you're 40 whether to save in before- or after-tax accounts when you don't know what will happen to your tax situation in the next 30-40 years.

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.

Amen to that! While I'm profoundly grateful to have enough in retirement that I can travel beyond my wildest dreams, fund my grandchildren's 529 accounts, provide for my LTC if necessary and most likely leave a legacy, I still feel like I'm being punished for not spending every dime I have.

 

[Exchme]

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...

It's only in the mouths of politicians that rich folks pay 15%. In reality, the government is there to meet those folks as well.

There's NIIT which bumps their LTCG rate up to 18.8%, the 20% capital gains rate at higher AGI, AMT which bumps it 26% or even to 28%, IRMAA which adds thousands, the SALT deduction phase-out which can bump their marginal rate way up, the standard deduction phase-out, the fact that there will be non-qualified dividends in the mix as well that are taxed as ordinary income and more that I'm not thinking of.

 

[Al18]

I’m not sure if many watched the video I linked to in post #78, but the bottom line was the 80 year old couple who had $2M in a traditional IRA have an RMD of $99K and their effective tax rate on $180K AGI was just 9.2%. Doesn’t look like the tax torpedo mentioned often.

 

[NomDeER]

I’m not sure if many watched the video I linked to in post #78, but the bottom line was the 80 year old couple who had $2M in a traditional IRA have an RMD of $99K and their effective tax rate on $180K AGI was just 9.2%. Doesn’t look like the tax torpedo mentioned often.

What are the taxes on that if one of them died last year? (The man in this example already has lived longer than the average life expectancy.) Or, what if one of them had died sooner than that? Or, if it was one person with that financial situation that had been single the entire time? And there are plenty of people here with different financial situations.

Someone can always pick one example to prove a point. The reality is that the impact of RMDs varies.

 

[Al18]

I suggest you check with the person who made the YouTube video - he covers different situations in his other video's.

 

[jazz4cash]

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 remember a poster that was adamant about being “forced” to spend their nestegg. I don’t believe it was planned but once I realized RMDs are in the same ballpark as SWR I chose to believe it was not an issue. That was before I learned about IRMMA. A colleague seems to blame me personally since I was the first to inform him of RMDs.

 

[pb4uski]

....our tax code relentlessly and cruelly penalizes thrift...

Not really, unless your thrift results in income; then the income is taxed but at a lower rate than wages.

 

[pb4uski]

It's only in the mouths of politicians that rich folks pay 15%. In reality, the government is there to meet those folks as well.

There's NIIT which bumps their LTCG rate up to 18.8%, the 20% capital gains rate at higher AGI, AMT which bumps it 26% or even to 28%, IRMAA which adds thousands, the SALT deduction phase-out which can bump their marginal rate way up, the standard deduction phase-out, the fact that there will be non-qualified dividends in the mix as well that are taxed as ordinary income and more that I'm not thinking of.

What? Are you saying that if you make more that you are expected to pay more? WTH!

 

[pb4uski]

I’m not sure if many watched the video I linked to in post #78, but the bottom line was the 80 year old couple who had $2M in a traditional IRA have an RMD of $99K and their effective tax rate on $180K AGI was just 9.2%. Doesn’t look like the tax torpedo mentioned often.

+1 I get different numbers using IRS & State Tax Calculator | 2005 -- 2025

If they have $99k of RMDs and $60k of SS in 2026 their federal tax is 7.54% of their $159k of income. Horrible!

If one dies so they have $99k of RMD and $30k of SS their 2026 tax is 13.02% of the surviving spouse's $129k of income.

 

[Diogenes]

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.

If Smith spends all of his money, leaving him with no capital and hence no subsequent capital gains, dividends or whatnot... I mean, nothing saved, nothing invested, nothing compounded... then Smith will only have SS in retirement, which likely means next to zero income taxes. If Jones, who never out-earned Smith but greatly out-saved him, ends up with multiple millions, across traditional IRAs, 401Ks, 403Bs, and taxable accounts, and puts that stuff into a Boglehead-style 3-fund portfolio... then what's Jones' tax bill going to be in retirement?

Mind you, Smith and Jones had the same W2 their whole lives. Maybe Smith even outearned Jones.

 

[TickTock]

So in retirement, Jones has more income than Smith and pays more taxes. No surprise there - our tax system is progressive.

But you framed it as, "our tax code relentlessly and cruelly penalizes thrift" (underlining is mine). Baker, who has the same income and spends it all while w*rking as Smith does in retirement pays the same or very likely higher taxes than Smith. That's not a penalty on saving/thrift/investing.

You could argue that the tax code relentlessly and cruelly penalizes income - but that's an entirely different argument.

 

[NW-Bound]

Paying 24% tax to do Roth conversion is not bad, if I am going to make more than 24% on Roth investment gain each year tax free from that point.

Oh wait. Can I really make 24+% each and every single year?

Hmmm... It's not guaranteed, but I have been working harder managing our Roth accounts than the tax-deferred accounts. The taxable accounts are just buy-and-hold and neglected.

By the way, the 24% is marginal tax, and not effective tax rate anyway. It really does not hurt that bad.

 

[Dtail]

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.

Interesting.

 

[NW-Bound]

If Smith spends all of his money, leaving him with no capital and hence no subsequent capital gains, dividends or whatnot... I mean, nothing saved, nothing invested, nothing compounded... then Smith will only have SS in retirement, which likely means next to zero income taxes. If Jones, who never out-earned Smith but greatly out-saved him, ends up with multiple millions, across traditional IRAs, 401Ks, 403Bs, and taxable accounts, and puts that stuff into a Boglehead-style 3-fund portfolio... then what's Jones' tax bill going to be in retirement?

Mind you, Smith and Jones had the same W2 their whole lives. Maybe Smith even outearned Jones.

The Paradox of Thrift says that, ironically, it's the spendthrifts who keep the economy humming, and cause my stocks to go up for me to have big gains to pay taxes on.

 

[Al18]

I think some people simply forget how much taxes they paid while working, compared to the taxes during retirement. I keep a spreadsheet of taxes (Federal, SS and Medicare withheld, State and property tax). The 5 years before retiring, there wasn't much variation and I paid $31K per year in total taxes. After retiring, and performing $35K/year in Roth IRA conversions, I'm averaging $14K/year in total taxes. That's huge - I'm very pleased with those numbers. When I start RMD's - taxes will still be less than working.

 

[pb4uski]

Yeah, my federal income taxes today are 15-20% of what they were when I was working. In 2006 I paid more in federal income tax than the median household income.

 

[Gumby]

There were a couple years back in the aughts when my taxes exceeded six figures.

 

[pb4uski]

Ouch!

 

[Time2]

>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?

Yes it is, but is it better to leave an IRA or taxable funds to heirs, i.e. IRA, pay full tax, Taxable account pay 20% of full rate.

 

[Time2]

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

I feel the same, I'd say we were way above average as savers. My wife and I earned $X,XXX,XXX over our 37 yr married working time. We now have 1.88 times our total work income. Why should I get penalized, for our thrifty habits, when other people could do just as well on the same middle, middle class earnings we had. I will mention, we over saved and after SS we only spend less than a % of our nest egg. We did pull a little a more out this year to buy a new to us truck.

 

[COcheesehead]

There were a couple years back in the aughts when my taxes exceeded six figures.

I had a lot of years of low six figure taxes, but the year I paid capital gains on a real estate sale topped them all. It was a biggie check to Uncle Sam, over $400k. I hope he spent it well.

 

[RunningBum]

A little over halfway to 7 figures for me one year, and over 6 figures the next. This is precisely why I discounted my investment net worth by expected future tax liability in my Net Worth (aka, Can I retire yet?) spreadsheet. Once set up that way, there is no impetus to change that method, as I still have $600K in future tax liability if I am the one that drains my taxable account.

 

[FIYes]

Interesting to see the diversity of incomes on this forum. When we were working DH and I never had a combined income of six figures much less a tax bill of that magnitude.

 

[athena53]

[/QUOTE]

The Paradox of Thrift says that, ironically, it's the spendthrifts who keep the economy humming, and cause my stocks to go up for me to have big gains to pay taxes on.

Yeah, I try to comfort myself with that thought. I'm making a profit on others' spendthrift habits. A dear friend, until recently, had a very bad Amazon habit, had subscriptions to everything and has had a storage unit for stuff he hasn't touched the last 6 years.

And, on the RMD topic, he lost his job a couple of months ago and since his "emergency fund" was taking loans from his 401(k), he had unpaid balances that he couldn't pay back in 60 days. He knows it but doesn't have the funds to pay them back. He just turned 75 and is looking for another job. I just did some research- the unpaid balances do NOT count towards his RMD for this year. Nasty.

 

[Time2]

I’m not sure if many watched the video I linked to in post #78, but the bottom line was the 80 year old couple who had $2M in a traditional IRA have an RMD of $99K and their effective tax rate on $180K AGI was just 9.2%. Doesn’t look like the tax torpedo mentioned often.

If I was part of that 80 year old couple, I would be wishing I had Roth converted more money in the 12% tax bracket. About $30,000 of that is in the 22% tax bracket, or an extra $3,000 in tax. Without the OBBB and the extra $6k each, it would be $4200 more tax. It's not a nightmare, but if it is avoidable, why not? In our case, I would be reinvesting about $160k of that $180k, Oh, minus the tax owed.