Apparently, RMDs are a problem now

[NomDeER]

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.

And, if your spouse died, you might be wishing even more that you had converted more. The husband in this example already has outlived the average life expectancy for a man.

 

[newuser]

I watched the video of the RMD's on a $2M IRA for a couple and also watched the subsequent one on the widow. It was eye-opening and not as bad as I have feared. I've just entered the stage where Roth conversions make the most sense. I think I will stick to the plan to convert about $50K per year. But it's nice to have seen the modeling. And the videos are under 15 min, and not painful to watch on 1.5x playback.

 

[Chuckanut]

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

Indeed! FWIW, towards the end of my working days I was paying nearly 7% in SS and Medicare taxes. As well as another 4 to 5 percent as my contribution to the pension plan. Upon retirement these taxes and contributions went away.

 

[SecondCor521]

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.

I'm not sure but I believe the second inheritor must follow the first inheritor's 10 year time frame. So in your example the nephew would only have to the end of DW's 10 year timeframe (which has already probably elapsed in part), not an additional 10 years.

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

I think that would work.

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

 

[Koolau]

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.

And then those of us who practice thrift may be "asked" to support the spendthrift. Now there's the irony.

 

[laurence]

Way late to this convo - but as a 51 year old my RMDs won't kick in until 75 @ less than 5%. Considering my life expectancy is 80 this feels like a problem that gets over weighted. So sure, there is some downside risk of my spouse outlives me by a ton but keeping my income low during the ACA years has it's advantages too.

 

[Dtail]

Way late to this convo - but as a 51 year old my RMDs won't kick in until 75 @ less than 5%. Considering my life expectancy is 80 this feels like a problem that gets over weighted. So sure, there is some downside risk of my spouse outlives me by a ton but keeping my income low during the ACA years has it's advantages too.

That was my take during my ACA medical years. Savings were 22k for my brother and me, so chose managing MAGI instead of Roth conversions.

 

[marko]

I'm not sure but I believe the second inheritor must follow the first inheritor's 10 year time frame. So in your example the nephew would only have to the end of DW's 10 year timeframe (which has already probably elapsed in part), not an additional 10 years.

IIRC, as a spouse, DW can essentially have her inherited IRA (mine originally) rolled-over and absorbed into her own. This resets the clock to her timeline as if it was always hers. Then the next, non-spousal inheritor has 10 years to deplete.

But....! the 25 year old pool boy or 45 year old lounge lizard (DW's next spouse) could again reset the clock to his own age 70x timeline and his next spouse could do the same....and on.

All of a sudden it's 2175 and the IRS still hasn't gotten all the money that I deferred!

 

[SecondCor521]

IIRC, as a spouse, DW can essentially have her inherited IRA (mine originally) rolled-over and absorbed into her own. This resets the clock to her timeline as if it was always hers. Then the next, non-spousal inheritor has 10 years to deplete.

Ah right. If your DW chose that option you would be right. A surviving spouse has several options, and that's one of them.

 

[NW-Bound]

IIRC, as a spouse, DW can essentially have her inherited IRA (mine originally) rolled-over and absorbed into her own. This resets the clock to her timeline as if it was always hers. Then the next, non-spousal inheritor has 10 years to deplete.

But....! the 25 year old pool boy or 45 year old lounge lizard (DW's next spouse) could again reset the clock to his own age 70x timeline and his next spouse could do the same....and on.

All of a sudden it's 2175 and the IRS still hasn't gotten all the money that I deferred!

What makes you think that somewhere along the chain, there's not a spendthrift who BTD in just a couple of years?

It could happen as soon as that pool boy.

 

[marko]

What makes you think that somewhere along the chain, there's not a spendthrift who BTD in just a couple of years?

It could happen as soon as that pool boy.

Well if the pool boy was smart enough in the first place to marry the aging widow Marko, he'd wait before withdrawing anything until he's of age.

Instead, he'd live very comfortably on the late DWs other assets and income until then and likely find another older, lonely, wealthy widow who ummm.......needs her pool cleaned and marry her as well. (In truth, I've actually seen a few variations of this! The original heirs lose their minds)

Meanwhile, that spousal IRA continues to grow tax deferred at 8-10% for 40-50 more years until Jimmy (yes, his real name is Jimmy) reaches 59.5 or 73+.

Maybe after 25 years, his accountant, noting that "his" IRA is now approaching $40MM, suggests paying the penalty and slowly withdrawing small amounts each year. Who knows.

But Jimmy, now a very bored, 52 year old, 2x widower and extremely wealthy has a nice looking, athletic, smart 22 year old young lady who comes to clean his pool....she's always forgetting something and has to come back the next day.

She's unusually friendly towards him.......

And the hunter becomes the hunted!

 

[TickTock]

Way late to this convo - but as a 51 year old my RMDs won't kick in until 75 @ less than 5%. Considering my life expectancy is 80 this feels like a problem that gets over weighted. So sure, there is some downside risk of my spouse outlives me by a ton but keeping my income low during the ACA years has it's advantages too.

Right. ACA MAGI management until 65 (unless your situation is such that it's going to be over the cliff no matter what), Roth conversions from 65 to 74. Delaying SS (if it makes sense) can also help conversions from 65 through 69.

 

[reneeh63]

I wonder if the disproportionate number of married couples on here explains why there's relatively little interest in roth conversions to lessen RMDs?

Being single, I see just how quickly I'll hit those higher tax brackets and how relatively small the annual IRMAA penalties are. I'll definitely be converting all the years I can through age 75.

 

[SecondCor521]

I wonder if the disproportionate number of married couples on here explains why there's relatively little interest in roth conversions to lessen RMDs?

Being single, I see just how quickly I'll hit those higher tax brackets and how relatively small the annual IRMAA penalties are. I'll definitely be converting all the years I can through age 75.

I don't think it is a matter of single vs. married. The tax brackets and IRMAA brackets are - for the most part - double for MFJ, so on a per person basis it works out to be a similar situation.

Actually, some married folks on here are motivated to do Roth conversions due to the widow/widower tax trap, which is simply that when the first spouse passes, the survivor is often left with more than half of the income but now has to file single.

Also, there is a fair amount of interest here in Roth conversions. I've seen, and participated in, a lot of those thread. I'm sure if you search you can find them. Or start a new one and you'll see the interest - it's a perennial topic around here.

Finally, the real noticeable benefits to Roth conversions happen where the tax brackets jump by quite a bit, so from 12% to 22%, and from 24% to 32%. I think there are quite a few folks here who are in the 22% to 24% bracket range. Those folks probably find themselves in the situation where the estimation error on their tax situation over the next two decades is far higher than the 22% vs 24% difference, so they tend to shrug their shoulders and say some version of "I can't tell, so I won't do anything" or "It's not that big of a deal, so I won't do anything."

 

[pb4uski]

I wonder if the disproportionate number of married couples on here explains why there's relatively little interest in roth conversions to lessen RMDs?

Being single, I see just how quickly I'll hit those higher tax brackets and how relatively small the annual IRMAA penalties are. I'll definitely be converting all the years I can through age 75.

I'm not sure what marital status has to do with it. We're married and have Roth converted to the top of the 15%/12% tax bracket since retiring in 2012. While over those years we converted 57% of our tax-deferred balance at the time that we retired, because of growth our tax-deferred is 114% of what it was when we retired. IOW, we've pretty much only converted the growth and are like a dog chasing its tail.

My projections suuggest that despite significant Roth conversions since retiring that our RMDs will be a combination of 12% and 22% tax brackets for life. If one of us dies, then RMDs will be 24% for life for sure... the widow(er) trap referred to in the prior post.

Nice problem to have.

However, since I was in the 28% bracket for many/most of the years that that income was deferred and we paid ~6% in state income taxes so saved ~34%, since we are no longer subject to state income taxes even if we end up paying 12%/22% or even 24% we are still ahead, so deferring income was beneficial.

 

[albireo13]

As a 70yo just starting Medicare, I (we) have the bulk of savings in tax deferred IRAs. We are likely going to get hammered by RMDs. With our SS and pension incomes the IRMAA tables are a bigger issue than taxes.
Any Roth conversions will be small.
I am not happy about that but ….
most of my IRA contributions over the years were done under a company match (50-100%). This, even paying taxes, it has not been a bad deal.

 

[1Timothy]

As a 70yo just starting Medicare, I (we) have the bulk of savings in tax deferred IRAs. We are likely going to get hammered by RMDs. With our SS and pension incomes the IRMAA tables are a bigger issue than taxes.
Any Roth conversions will be small.
I am not happy about that but ….
most of my IRA contributions over the years were done under a company match (50-100%). This, even paying taxes, it has not been a bad deal.

Well said. Your point about the employer match is often overlooked in these discussions.

 

[Diogenes]

I wonder if the disproportionate number of married couples on here explains why there's relatively little interest in roth conversions to lessen RMDs?

Not to range excessively off-topic, but yes, one observes that the preponderance of posters are married-with-children (presumably the children are now adults), and so, most matters of tax planning, estate planning and so on, presuppose there being a spouse (or widow/widower) and descendants. The situation differs for persons who have no spouse and no children, but this is rarely discussed... either here, or on Bogleheads, or in the retirement literature overall. Indeed, so much of the FIRE literature is predicated on "spending more time with one's family" as a reason for retiring early. Persons with no relatives - I mean literally no relatives - would have, how shall we put it, alternative considerations.

 

[Koolau]

^^^^^

My original planning was based on having a spouse during retirement. But when I thought hard, it seemed virtually inevitable that sooner or later, one of the spise (plural of spouse) always passes. It was then I began my quest to convert as much as possible of my stash to Roths . I did a pretty good j*b of it. My hope is that one of us survives in good shape to enjoy the Roths. I guess we'll see.

 

[marko]

As a 70yo just starting Medicare, I (we) have the bulk of savings in tax deferred IRAs. We are likely going to get hammered by RMDs. With our SS and pension incomes the IRMAA tables are a bigger issue than taxes.
Any Roth conversions will be small.
I am not happy about that but ….
most of my IRA contributions over the years were done under a company match (50-100%). This, even paying taxes, it has not been a bad deal.

Right on! (Do people still say that?)
Lemme see: I maxed out my 401k contributions with a hefty company match (free money!) from day-one.

Between the match and tax deferred, I was able to invest more agressively. When one dollar in equals two dollars to invest, you can be bold. All while reducing my income tax at the time.

Even after ER, it all continues to grow tax deferred for the past 40 years.

Now, its RMD time. I need to withdraw a pittance each year---which I need to do anyway to cover my bills. Meanwhile the balance keeps running away from me faster than I can withdraw.

 

[Gumby]

Sadly, I never got a 401k match, so it was all about the tax rate arbitrage for me.

 

[Koolau]

Right on! (Do people still say that?)
Lemme see: I maxed out my 401k contributions with a hefty company match (free money!) from day-one.

Between the match and tax deferred, I was able to invest more agressively. When one dollar in equals two dollars to invest, you can be bold. All while reducing my income tax at the time.

Even after ER, it all continues to grow tax deferred for the past 40 years.

Now, its RMD time. I need to withdraw a pittance each year---which I need to do anyway to cover my bills. Meanwhile the balance keeps running away from me faster than I can withdraw.

This is Deja Vu (all over again)!

 

[jazz4cash]

I remember the confusion among employees when megacorp rolled out the 401k to replace our Employee Stock Purchase Plan (that was generally being used as a piggy bank). People were skeptical and did not trust the new plan. It was inconceivable that something like a Roth would come along, so I believe they could also modify or eliminate the Roth. Hopefully current accounts would be protected from any change.

 

[COcheesehead]

Not to range excessively off-topic, but yes, one observes that the preponderance of posters are married-with-children (presumably the children are now adults), and so, most matters of tax planning, estate planning and so on, presuppose there being a spouse (or widow/widower) and descendants. The situation differs for persons who have no spouse and no children, but this is rarely discussed... either here, or on Bogleheads, or in the retirement literature overall. Indeed, so much of the FIRE literature is predicated on "spending more time with one's family" as a reason for retiring early. Persons with no relatives - I mean literally no relatives - would have, how shall we put it, alternative considerations.

I’ve brought this up on here before. We have no kids. It changes estate planning and legacy giving a lot. We have worked through the challenges, but the answers are not always apparent.

 

[Andre1969]

I'm guessing that griping about RMDs has been going on for as long as RMDs existed. I remember my Grandmom complaining about them back in the mid 1990s. Back then I didn't understand them, so I was siding with her at the time, thinking why should she have to withdraw the money if she doesn't need it. But, once I got a bit older, and had enrolled in my first 401k, I finally got it. The idea that the gov't is giving me a tax break now, letting it grow tax free, but at some point, they're going to want something in return. So, once I understood it, it seemed fair to me.

I remember my Mom starting to carry on as well, when that first SECURE Act, or whatever it was passed. The one that upped RMD age from 70.5 to 72. She just missed the cutoff and had to start RMDs at 70.5. And she was MIFFED! I tried to explain to her look, you got a tax break when it went in, you didn't pay taxes as it grew, so you're still getting a nice benefit. She was like, reluctantly, I guess.... But she was still annoyed. And, like my Grandmom, she was also annoyed because she didn't need the money. I told her that just because she withdrew it, doesn't mean she HAS to spend it. She could invest/save it somewhere else.

I think people just don't like it when the government tells them what to do. And, forcing an RMD on someone is the government telling them what to do. Nevermind the fact that it was an agreement you made, when you started that 401k/IRA in the first place.

I'm not sure if I'm going to do Roth conversions yet, but I am planning on starting to take withdrawals at 59.5. I ran my numbers through an RMD calculator, and if I was 75, the amount I have in my rollover-from-work IRAs and 401k would give me an RMD if around $70K the first year. But in reality, I have 19 years before I turn 75. So in 19 years, that total could blow up something fierce.

I have one rollover IRA, from a previous employer, that I stopped contributing to in May of 2009, when I switched employers. Since then, its value has blown up 6.38X ! While that's no guarantee for the future, if it did that in 16 years, it's conceivable my total could blow up by that much or even more, in 19 years.