Facing the Age 73 RMD hurdle - any advice on tax strategies?

[Lydia Elizabeth]

Quick question for those managing their own tax strategies in retirement...
I’m trying to plan out the next few years and keep getting stuck on the "Age 73" RMD hurdle. For those who have a solid amount sitting in traditional 401ks or IRAs, how are you handling the forced distributions without getting absolutely crushed on taxes?
Are most people here actively doing partial Roth conversions early in retirement to lower the total RMD hit, or are you just waiting it out and taking the tax bump when the time comes? Would love to hear what strategies actually worked for you.

 

[SecondCor521]

I have been doing partial Roth conversions to level out my top marginal rate for a number of years.

I have a spreadsheet that attempts to lay out my approximate tax future for the next 30 to 40 years. It seems to be approximately correct, but over that time frame the degree of uncertainty is relatively high. I figure I'm in the ballpark.

Usually there is some breakpoint like an ACA FPL% limit or the top of a tax bracket or an IRMAA breakpoint which seems to make sense each year for my AGI target. I manage to that target based on a December pro forma tax return, Roth conversions in late December, and HSA contributions in the spring.

What most people find, because we tend to spend conservatively here, is that one ends up with a larger Roth, a more balanced traditional/Roth ratio, but a traditional IRA which is still large. This has been my experience as well.

 

[Dtail]

After retiring at 57, I used a lot of taxable in order to manage my MAGI for ACA purposes, instead of larger Roth conversions.
I know am doing some Roth conversion up to a tax bracket top and avoid IRMAA. There will still be a large IRA balance at (75 for me), but built up a lot of that balance with 35% tax bracket deductions.
So overall, am satisfied.

 

[Gumby]

We have two SS checks and two pension checks every month, so we already have a high baseline income. Since retiring seven years ago, we've been doing relatively small Roth conversions up to the top of our marginal tax bracket, so the tIRA/401k etc. balances continue to grow. When I turn 70.5, I will shift to making my church pledge via QCD and continue that when RMDs start. If there is any room in the tax bracket after the RMD, we'll continue to Roth convert on top of that. The young wife is two years younger than me and need not make a RMD until she is 75, so we'll have a four year span with only one RMD. Eventually, however, we'll have two RMDs from our ever growing tIRAs. Then, we'll just suck it up and pay the taxes. When the vast majority of the money was put into those accounts, our tax bracket was much, much higher than I expect it will ever be again, so we still come out ahead.

 

[VanWinkle]

I have been doing Roth conversions for 8 years and my IRA has not been reduced, but has stopped growing. It is all bonds to round out my 62/38 asset allocation. RMDs start next year at 73 so the taxes will be about the same as those on the Roth Conversions I completed over the years.

 

[sengsational]

I have been doing all-years financial modeling for more than 10 years. First with I-ORP and recently with OWL (optimal wealth planner). It's not quick or easy to get a modeling system going with your own data, but once you get going, annual runs are quick. Anyway, these plans kept saying "convert", and usually at levels that were what I thought were crazy high. I didn't go quite as high, but was/am converting all along at significant levels. There's really no other way.

 

[old medic]

I have been doing partial Roth conversions to level out my top marginal rate for a number of years.

We just started with doing conversions last year with plans to hit our 12% limit each year. With just pensions and one SS, income will be an easy # to figure. Got 10/17 years to move it all before DW starts SS.

 

[athena53]

I have been doing partial Roth conversions to level out my top marginal rate for a number of years.

<snip>

What most people find, because we tend to spend conservatively here, is that one ends up with a larger Roth, a more balanced traditional/Roth ratio, but a traditional IRA which is still large. This has been my experience as well.

That's been my experience. I turned 73 this year and have been doing Roth conversions over the years but they were a drop in the bucket. Good problem to have, I guess. I've been donating generously to charity all along so a good part of my RMDs are QCDs. I also realized that Iowa, the state where I'd planned to move to be near my son and daughter-in-law and my wonderful grandchildren, does not tax IRA withdrawals or my $1,800/month pension income so I moved here from Missouri, which does tax them, a bit earlier than planned. Just got here a week ago.

A few years ago I saw a video by a guy named Craig Wear who claimed you'd be better off in the long run if you just converted all your traditional 401(k)s into a Roth right now and took the tax bite. I entered some info into their site and they were willing to create a custom plan for $10,000.

I did not take them up on it.

 

[junkanoo]

I have been doing all-years financial modeling for more than 10 years. First with I-ORP and recently with OWL (optimal wealth planner). It's not quick or easy to get a modeling system going with your own data, but once you get going, annual runs are quick. Anyway, these plans kept saying "convert", and usually at levels that were what I thought were crazy high. I didn't go quite as high, but was/am converting all along at significant levels. There's really no other way.

Shouldn't this thread be moved to the Fire and Money subforum?

 

[COcheesehead]

You can do conversions, take funds out in low tax years prior to RMDs, pay your taxes via withholding from an IRA and/or do QCDs, You can also slow the growth. Advantages, disadvantages to all of those.

 

[Gumby]

Shouldn't this thread be moved to the Fire and Money subforum?

Good point. I have moved it.

 

[Koolau]

Early on, well before RMDs I either took from my 401(k)/tIRAs for living expenses and also did Roth conversions. That strategy was to protect me from huge RMDs later on. Approaching 80, I find that my 401(k) has "grown back" and is becoming a tax bomb that has only a couple of remedies. I can convert some to tIRAs and do QCDs with them or (ugh) I can pay the taxes!

Financial results have turned out much better than I expected so now, it's time to pay the piper (aka Tax Man).

By the way I DID manage to convert all my tIRAs to Roth, but that pesky 401(k) just keeps growing faster than I can deplete it. Shucky Dern!

 

[pjigar]

You can do conversions, take funds out in low tax years prior to RMDs, pay your taxes via withholding from an IRA and/or do QCDs, You can also slow the growth. Advantages, disadvantages to all of those.

In addition to these, you can also buy QLAC but the costs (invisible profit of the provider) may outweigh the tax benefits. The best way to tackle RMD is proactively.

In a nutshell, try to project your tax bracket in RMD. If your current tax bracket is lower or the same than the projected tax bracket then do Roth conversion/contributions up to top of that tax bracket.

 

[MarieIG]

I've been making conversions since I retired. When I turn 70.5 I'll start taking QCD out of my IRA.

Initially DH was pretty much anti conversation so his Roth is much smaller. Also his RMDs kick in at an earlier age than mine so his traditional IRA and 401k will still generate significant RMDs.

 

[TheWizard]

...A few years ago I saw a video by a guy named Craig Wear who claimed you'd be better off in the long run if you just converted all your traditional 401(k)s into a Roth right now and took the tax bite. I entered some info into their site and they were willing to create a custom plan for $10,000...

This is almost always wrong, especially for single people.
I've been close to the top of the 24% Federal tax bracket for the past several years, with my AGI including strategic Roth conversions and lately, RMDs.

If I were so foolish as to try to Roth convert a significant portion of my $1M+ in tax-deferred, I'd get into the 32% Federal tax bracket immediately and possibly higher brackets, depending. This is not a desirable outcome.

Just staying with RMDs, including some in QCDs, works absolutely fine for me...

 

[TheWizard]

To answer the OP's question, what tends to work best is projecting your retirement finances year by year with a spreadsheet, updated annually.
In your 60s, pull from tax-deferred for living expenses and Roth conversions while delaying SS to age 70.
The idea is to keep your AGI roughly level, inflation -adjusted, year to year, perhaps with an eye to tax brackets and IRMAA tiers.

Once you start SS at 70, you'll have to reduce your annual Roth conversion number to contain your AGI. Your Roth conversion amounts for age 70, 71, 72 would then be very close+/- to what your starting RMD would be at age 73.

So then at age 73, stop or significantly reduce Roth conversions and your AGI transitions seamlessly; no big jump when RMDs start.

That's basically what I did and it's worked out fine, now in my fourth year of RMDs.

There are some refinements to the basic AGI leveling concept based on QCDs, the next higher tax bracket, and the next higher IRMAA tier. I still do a smallish Roth conversion each December after factoring in all those things...

 

[Venturer]

I am 74 and DW just ( 6/02 turned 73 and we did not set up any roth accounts before we retired. I now know we were stupid or ingnorant but thats where we are. So looking ahead we will just have to bite the tax bullit as it comes along with higher RMD's as we age. "Hindsite is 20-20"

 

[COcheesehead]

There’s an underlying assumption here and you know what they say about assumptions.
If tax brackets keep getting updated, your worst fears may not happen for a long time if at all.
Heck even my RMD age got pushed to 75. Lot of things can happen in the next 30 years.

 

[junkanoo]

In addition to these, you can also buy QLAC but the costs (invisible profit of the provider) may outweigh the tax benefits. The best way to tackle RMD is proactively.

In a nutshell, try to project your tax bracket in RMD. If your current tax bracket is lower or the same than the projected tax bracket then do Roth conversion/contributions up to top of that tax bracket.

Agreed about the QLACs.

However, when you are ultimately paying taxes on the RMDs, if you assign the highest tax brackets to the RMD, you might be in the 32% bracket for just a cup of coffee, while also filling up the 12-22-24% brackets. So, the distributed cost of all the applicable brackets is your real cost for the RMDs.

Here is an example, for a couple (age 80) with a $5 million T-IRA balance (which is much higher than the balance for most couples). The whole video is worth watching, but the math on the RMDs (and their brackets) is presented around the 9 minute mark. He also shares the "Widow's Trap" in another video.

 

[PaulR888]

That's been my experience. I turned 73 this year and have been doing Roth conversions over the years but they were a drop in the bucket. Good problem to have, I guess. I've been donating generously to charity all along so a good part of my RMDs are QCDs. I also realized that Iowa, the state where I'd planned to move to be near my son and daughter-in-law and my wonderful grandchildren, does not tax IRA withdrawals or my $1,800/month pension income so I moved here from Missouri, which does tax them, a bit earlier than planned. Just got here a week ago.

A few years ago I saw a video by a guy named Craig Wear who claimed you'd be better off in the long run if you just converted all your traditional 401(k)s into a Roth right now and took the tax bite. I entered some info into their site and they were willing to create a custom plan for $10,000.

I did not take them up on it.

Craig Wear's strategy has some merit, but I don't have the huevos to do it. When you do a mega-Roth, at the moment you hit the point of 85% tax ceiling on Social Security, your taxes come down. And the big IRMAA hit is only for one year. Ed Slott did that in around 2010 when the IRS allowed a one-time 2 step conversion with taxes paid over a two year period. Ed is all smiles now. He has no regrets.

2 thoughts from me:
1) You are allowed to defer your first RMD until April 1 of the following year. Came in handy for me as I also had a home sale in the year my RMDs began. But then you have to take your normal RMD in that following year, so you take 2 RMDs that year. Do the math and see if the deferral option benefits you.

2) I like to take my RMDs as soon as I am able, usually by the end of January. This reduces the growth of these assets in my IRA (and reduces the inbedded IOU to the IRS) and transfers the growth to my taxable account. Once I get the RMD out of the way, I know exactly what my Fed and State withholding is on the RMD. So when I meet with my accountant in March and she creates my initial Estimated Taxes Schedule we can reduce the Fed and State estimated taxes by the amounts of the RMD withholdings.

 

[PatrickA5]

If you have a reason to buy a SPIA with your Traditional IRA, you might want to look into the Secure Act 2.0 new rules allowing the annuity payouts to be subtracted from the RMD. Basically, you add your Traditional IRA balance (after spending some from the IRA on the annuity) plus the year end FMV of the annuity. Use this total to calculate your RMD and then subtract the annual annuity payment. What's left is your new RMD for the year.

 

[TheWizard]

...However, when you are ultimately paying taxes on the RMDs, if you assign the highest tax brackets to the RMD, you might be in the 32% bracket for just a cup of coffee, while also filling up the 12-22-24% brackets. So, the distributed cost of all the applicable brackets is your real cost for the RMDs...

I agree.
I look at all "mandatory" retirement income at being taxed at the average or effective Federal tax rate, which is around 17% in my case.
This income, for me, includes pension/annuity income, SS, RMDs, and taxable dividends. There are adjustments for SS and dividend income.

Discretionary income gets considered at the 24% or higher marginal Federal tax rate for me and includes Roth conversions and QCDs (negatively). It would also include any additional withdrawals from tax deferred for spending and any sort of employment income (heaven help me)...

 

[stepford]

I've been doing Roth conversions to the top of the 22% bracket since I ER'd at 55, but with a pension and other income the amount converted has been relatively small. Meanwhile my tax deferred accounts have basically metastasized and become about 2/3d of my NW.

The result is that even though I don't officially have to take RMDs until 75 I'm essentially starting them now at age 65 and will (barely) avoid the 32% and NIIT, but be in the 3rd IRMAA tier pretty much forever.

While I've castigated myself for not doing more aggressive conversions earlier, the total amount I would have saved by doing so really wouldn't have been all that much. "You can pay me now, or you can pay me later".

 

[TheWizard]

Craig Wear's strategy has some merit, but I don't have the huevos to do it. When you do a mega-Roth, at the moment you hit the point of 85% tax ceiling on Social Security, your taxes come down...

This is definitely not true.
Some of us have had 85% of SS included in AGI from the beginning.
I'm close to the top of the 24% Federal tax bracket with zero Roth conversions and pay around $34,000 in Federal income tax (last year).
If I did a $200,000 Roth conversion this year, I would owe around $66,000 additional Federal tax.
That strategy would NOT bring my taxes down...

 

[TheWizard]

... Ed Slott did that in around 2010 when the IRS allowed a one-time 2 step conversion with taxes paid over a two year period. Ed is all smiles now. He has no regrets...

Ed Slott is not the brightest bulb on the tree when it comes to the math involved with retirement finances. (No offense, Ed.)

I don't have access to the dollar amounts he was dealing with personally in 2010, so I can't comment on how better or worse different strategies would have been.

It's important to understand that Ed has a vested interest in the whole Roth conversion "industry", for lack of a better term.
So when Ed comes on TV, it's best to listen critically for a while before searching for something better to watch...