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

[junkanoo]

No. Any Roth conversions you do or don't do affect the "top" of your RMDs. See below.

Yes, except for the RMDs. See below.

Yes, and it includes your RMDs as well. For example, you could use QCDs to make the RMD marginal rate 0%. Also, the Roth conversions you did or didn't do affected the "top" of the RMDs - in other words, the marginal tax rate on the top of the RMDs.

The Traditional vs. Roth wiki article at Bogleheads discusses this under Common misconceptions.

See also Marginal Vs Effective Tax Rates And When To Use Each.

We had this discussion about a year ago and after posting the same links, you agreed with me (finally). What's changed?

From the link you posted:

"The first misconception is sometimes described as "contributions are taken from the top tax rate and are withdrawn later at the average rate". In other words, that you save a marginal rate when contributing but pay only an average rate (starting at 0% for the first dollar withdrawn) when withdrawing. Following is an example of why that is not true."

That's not what I wrote. It's not the average effective rate (starting at 0%). I wrote it's the worst rates remaining to be filled by RMDs. So, fill up your standard or non-standard deduction and the 10 and 12% (partially) brackets with your SS and pensions etc. and leave RMDs for the worst brackets. For many, as in the video I posted, that still leaves part of the 12% bracket, 22%, 24% bracket to be filled. That's the real math.

Sean Mullaney has presented at the Boglehead National Conference and has been featured on White Coat Investors. He knows his $hit.

Now ... if you watch the video and don't think his numbers are correct. Please bring the specifics forward.

 

[junkanoo]

Didn't do it for 2026 since my RMD was $75K and oldest daughter and spouse were transitioning in employment and my wife and I thought this would give them breathing room to sort out their situation (the other children didn't need or want any funds as they are in the 37% and 35% tax brackets). So, the RMD was deposited in my joint account with wife at Navy Federal Credit Union and we then turned around and transferred $37K to daughter and $37K to son-in-law. They used the funds to pay off their mortgage -- this accelerated their plans to be mortgage debt free once they retire completely from work -- they had been doubling up on mortgage payments for a number of years. Their money their choice, though I wouldn't have done that!

Next year, we'll gift the same amount to son and his spouse. . . . and then to youngest daughter the following years. We could have done equal amounts starting in 2026 to all children but felt the family would get a better bang out of this by transferring the RMD all to oldest daughter and spouse -- they are not in the 37 and 35 tax brackets like their siblings. We try to be as equitable as possible for all children, given all their circumstances.

I followed some of that. However, gifts under the limit are not taxable, so I don't see how the difference in your children's tax rate (either high or low) matters ... however, if it has nothing to do with their tax situation and everything to do with a perceived need, than that's a different matter.

 

[pb4uski]

It seems that some are appalled that tIRA withdrawals and RMDs are taxed, but it should not be a surprise to anyone. It's tax-deferred... NOT tax-free! You should have always known that you would eventually have to pay taxes on that income that was deferred.

For us, I think that the tax rate on RMDs will be lower than the taxes avoided with I deferred that income, especially while including both federal and state income taxes. During many of the years that I was deferring income I saved at least 28% federal and ~6% state for a total of 34%. Come RMD time in a few years, some RMD will be at 12% but most will be at 22%... so let's say 20% blended and 0% state. So it has worked out well for us. But even if we were paying 24% on all those withdrawals it still would be very beneficial for us!... 10% isn't chump change!

For those who it hasn't then I would say that if you knew that you would be so financially successful that your tax rate at RMD time would exceed the tax savings when you deferred that income then be thankful.

 

[SevenUp]

We had this discussion about a year ago and after posting the same links, you agreed with me (finally). What's changed?

From the link you posted:

"The first misconception is sometimes described as "contributions are taken from the top tax rate and are withdrawn later at the average rate". In other words, that you save a marginal rate when contributing but pay only an average rate (starting at 0% for the first dollar withdrawn) when withdrawing. Following is an example of why that is not true."

That's not what I wrote. It's not the average effective rate (starting at 0%). I wrote it's the worst rates remaining to be filled by RMDs. So, fill up your standard or non-standard deduction and the 10 and 12% (partially) brackets with your SS and pensions etc. and leave RMDs for the worst brackets. For many, as in the video I posted, that still leaves part of the 12% bracket, 22%, 24% bracket to be filled. That's the real math.

Sean Mullaney has presented at the Boglehead National Conference and has been featured on White Coat Investors. He knows his $hit.

Now ... if you watch the video and don't think his numbers are correct. Please bring the specifics forward.

If you want to know the tax rate you are paying on the entire RMD, then yes that's [(tax with RMD) - (tax without RMD)] / RMD.

If you want to know whether a Roth conversion affecting a future RMD looks favorable or not, then what matters is the tax rate on the change in RMD due to the Roth conversion. The tax rate on that change will be the marginal tax rate at the top of the RMD amount.

Are we in agreement on both those things?

 

[Slim11]

I am doing roth conversions, a little each year. I am in a 24 percent tax bracket now just under the next level. So is it worth it, maybe. If I can move enough of my 457/ira in the next few years i can limit some of those required distrabutions. If not , it will go to my child. As for if its a great idea, no one knows. You can add it up both ways and think one is better then the other. But, they can change the rules we play by at anytime. I do know it will be a large sum and a big distrabution if I dont do anything.

 

[jollystomper]

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.

We have been doing Roth conversions within the 22% tax bracket to lower our RMDs. We were able to fully convert DW's IRA. But my 401K and IRA will have But even with that I will have large that is still not going to prevent me from having "large" RMDs and subsequent taxes. The main action we will do is to start using QCDs at 70 for our charitable giving.

Beyond that, I am not sweating. There is no free lunch . After taxes still leaves a large sum that we will not need. And I remind myself that the benefits of my 401K (which is by far the largest of our tax deferred accounts) were not just deferred taxes on the investments, but a generous company match that compounded that growth. Plus, based on calculations, the tax deferred accounts, even with modest growth, is still projected to keep growing for 20 years beyond the RMD start, and we can choose to invest some/all of the after tax RMD. The tax may be "large", but it will not impact our desired lifestyle .

 

[albireo13]

I am in the situation of having the majority of my savings in a traditional IRA (tIRA).
I am 70yo and am facing the RMDs. Over the past few years we have pulled a lot of funds from the IRA to cover big home improvements and repairs. This made it hard to do Roth conversions without getting hit with taxes or, worse, the IRMAA brackets. I have only 3 years left so I will do a little bit of conversions.

We are in the 22% tax bracket normally and Roth conversions may bump us up into 24% bracket. That's a 2% increase ... not a big deal to worry about IMO. The bigger issue I feel is the IRMAA brackets.

 

[PatrickA5]

But won't you pay income tax on the full yearly annuity amount each year?

This combined with the lower RMD would create similar taxable income in both cases if I am not mistaken.

Perhaps I am missing something. I haven't thought about it too deeply.

-gauss

Yes, you have to pay taxes on the annuity income when you start receiving it.

The new rules will result in a lower initial RMD - as opposed to the old rules where you had to segregate the annuity from the remainder of the IRA and calculate the RMD on the value of the remaining money in the IRA.

Eventually, all of the IRA gets taxed anyway.

I certainly wouldn't buy a SPIA in order to lower RMD's. But, for those that it makes sense, it's something to keep in mind.

 

[Murdock75]

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.

I really don't understand people feeling that RMDs are "forced distributions" since the tax deferred years were a great path to wealth. Now it's time to pay the piper and I am fine with that. Now at 76 we are paying higher taxes, but have even greater wealth to give to charities and gift to children and grandkids. We all knew that this was the deal to get decades of tax free growth and should be thankful that this was available to us.

 

[junkanoo]

If you want to know the tax rate you are paying on the entire RMD, then yes that's [(tax with RMD) - (tax without RMD)] / RMD.

Nope. You can't do it that way, as "tax without RMD" will screw up things like correctly calculating taxes on Social Security (for example). Instead, it's simply ((Taxes attributed to RMDs)/RMDs)

If you want to know whether a Roth conversion affecting a future RMD looks favorable or not, then what matters is the tax rate on the change in RMD due to the Roth conversion. The tax rate on that change will be the marginal tax rate at the top of the RMD amount.

First of all, you're changing the whole discussion that you said you had a problem with. The example I provided was not a projection, but a couple's actual result in taxes with a very large RMD in 2026. That's very, very different from some sort of projection/forecast/guess. They simply are paying their taxes and even with around a $50K RMD, they are only paying 20% on the RMD (at the highest tax brackets remaining to be filled up). So, no Roth conversion, no problem.

That said, if you want to know whether a Roth conversion might have a favorable outcome on a projected RMD, then project the FULL applicable taxes on the RMD. If someone is at the 12% marginal tax bracket with a very large T-IRA balance and the projection is 20%, heck yeah, do the Roth Conversion. If it's at the 22% bracket ... and your projection indicates that you will lower the RMD-specific taxes from 20% to 19% ... you would have to ask yourself, why spend 22% to do that? Not to mention the benefit of paying taxes later when the dollar is worth less.

Additionally, how much conviction do you have in your projection/forecast/guess? And why? How sure are you that your T-IRA growth rate for the next 10-20 years will match the growth rate of the past? Point being, that projections aren't simple and forecasts may not be accurate.

Are we in agreement on both those things?

Nope.

 

[junkanoo]

I am in the situation of having the majority of my savings in a traditional IRA (tIRA).
I am 70yo and am facing the RMDs. Over the past few years we have pulled a lot of funds from the IRA to cover big home improvements and repairs. This made it hard to do Roth conversions without getting hit with taxes or, worse, the IRMAA brackets. I have only 3 years left so I will do a little bit of conversions.

Many here fall into the category of having most of their savings in a T-IRA (originally in a 401K plan at work).

We are in the 22% tax bracket normally and Roth conversions may bump us up into 24% bracket. That's a 2% increase ... not a big deal to worry about IMO. The bigger issue I feel is the IRMAA brackets.

If you're in the higher end of the 22% bracket, that means that any Roth conversion will be losing 12 cents on the dollar from your Senior Deduction (6% for each spouse) at least for the next three years. That means that your applicable tax rate on those Roth Conversions will be costing you 34% on the dollar.

It's likely that getting out of IRMAA jail would be better handled with tactical amounts of QCDs once you reach RMD age.

 

[PaulR888]

I am in the situation of having the majority of my savings in a traditional IRA (tIRA).
I am 70yo and am facing the RMDs. Over the past few years we have pulled a lot of funds from the IRA to cover big home improvements and repairs. This made it hard to do Roth conversions without getting hit with taxes or, worse, the IRMAA brackets. I have only 3 years left so I will do a little bit of conversions.

We are in the 22% tax bracket normally and Roth conversions may bump us up into 24% bracket. That's a 2% increase ... not a big deal to worry about IMO. The bigger issue I feel is the IRMAA brackets.

Historically, taxes are low now, with the max bracket at 37%. Do you think taxes will stay low or even go down in the future? The majority of savings in a T-IRA is problematical to me. I am not afraid of paying taxes now with a longer view and goal of minimizing taxes over my lifetime.

 

[TimSF]

I used my early-retirement, no-income years after 59 to aggressively Roth-convert my tIRA. Had I done nothing, I would have been looking at $250k+ a year income re RMD's. I think I've cut that in half so far.

 

[CalBird]

At age 75, probably the last decade of my life, if I have more money than I could spend and I had to pay more taxes for it, I think I am okay with that. I am more interested in how I would spend my life before 75 now.

 

[TheWizard]

I used my early-retirement, no-income years after 59 to aggressively Roth-convert my tIRA. Had I done nothing, I would have been looking at $250k+ a year income re RMD's. I think I've cut that in half so far.

$250k initial RMD is a lot!
That implies around $6.5M in tax-deferred back before you started converting. That's an impressive sum!

 

[Sunset]

To reduce RMD's we have been doing withdrawals of IRA's for spending and Roth conversions up to a taxation level we feel is acceptable and avoiding IRMMA.

Frankly it's a great problem to have, as it could be a lot worse.

 

[RetireBy90]

I did some rather aggressive Roth conversions and got caught for 2 years in higher IRMAA penalty before I learned my lesson there. After about 9 years of conversions to get close to IRMAA bracket and stay in 22%, I finished last year. Now with about 30% - 70% traditional-Roth we have decided the remaining traditional will be charitable QCDs and any remaining going to our church food missions.
For me (DW never worries about such things) it is nice to have that behind us. Of course laws can always change and mess up our plans, but for now we don’t have to worry about this anymore.

 

[PaulR888]

I did some rather aggressive Roth conversions and got caught for 2 years in higher IRMAA penalty before I learned my lesson there. After about 9 years of conversions to get close to IRMAA bracket and stay in 22%, I finished last year. Now with about 30% - 70% traditional-Roth we have decided the remaining traditional will be charitable QCDs and any remaining going to our church food missions.
For me (DW never worries about such things) it is nice to have that behind us. Of course laws can always change and mess up our plans, but for now we don’t have to worry about this anymore.

You did very well, congratulations. I would have no regrets over 2 IRMAA years.

 

[SevenUp]

If you want to know the tax rate you are paying on the entire RMD, then yes that's [(tax with RMD) - (tax without RMD)] / RMD.

Nope. You can't do it that way, as "tax without RMD" will screw up things like correctly calculating taxes on Social Security (for example). Instead, it's simply ((Taxes attributed to RMDs)/RMDs)

Sure you can - it's a simple thing to do. And yes, the taxable amount of SS benefits may change depending on the amount of RMDs, but that's reality.

It's similar to the 27% marginal tax rate that applies when ordinary income in the "12% bracket" moves some qualified dividends from their 0% to their 15% bracket.

If you want to know whether a Roth conversion affecting a future RMD looks favorable or not, then what matters is the tax rate on the change in RMD due to the Roth conversion. The tax rate on that change will be the marginal tax rate at the top of the RMD amount.

First of all, you're changing the whole discussion that you said you had a problem with. The example I provided was not a projection, but a couple's actual result in taxes with a very large RMD in 2026. That's very, very different from some sort of projection/forecast/guess. They simply are paying their taxes and even with around a $50K RMD, they are only paying 20% on the RMD (at the highest tax brackets remaining to be filled up). So, no Roth conversion, no problem.

That said, if you want to know whether a Roth conversion might have a favorable outcome on a projected RMD, then project the FULL applicable taxes on the RMD. If someone is at the 12% marginal tax bracket with a very large T-IRA balance and the projection is 20%, heck yeah, do the Roth Conversion. If it's at the 22% bracket ... and your projection indicates that you will lower the RMD-specific taxes from 20% to 19% ... you would have to ask yourself, why spend 22% to do that? Not to mention the benefit of paying taxes later when the dollar is worth less.

Additionally, how much conviction do you have in your projection/forecast/guess? And why? How sure are you that your T-IRA growth rate for the next 10-20 years will match the growth rate of the past? Point being, that projections aren't simple and forecasts may not be accurate.

There are two different questions:
1. What is the effective rate on the whole RMD and is that "a problem"?
2. What is the marginal rate on the top of the RMD and how does that affect the choice to do a Roth conversion?

Separately, it appears we agree that projections many years into the future should be taken with many grains of salt.

Are we in agreement on both those things?

Nope.

Oh, well, life goes on....

 

[iloveyoga]

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.

Welcome to Iowa! I've lived here all my life.

 

[Route246]

I really don't understand people feeling that RMDs are "forced distributions" since the tax deferred years were a great path to wealth. Now it's time to pay the piper and I am fine with that. Now at 76 we are paying higher taxes, but have even greater wealth to give to charities and gift to children and grandkids. We all knew that this was the deal to get decades of tax free growth and should be thankful that this was available to us.

This.

My sentiments, exactly. I'm not sure why people fret over RMD. They've benefitted immensely iff they invested wisely in deferring taxes for the years the money was in the tax-deferred state. The IRA is not a pact with the devil that comes due to you upon RMD or your heirs upon their death. What it has given you is the opportunity to compound every penny of deferred tax until RMD or your death. It is a fantastic benefit available to high-propensity savers.

 

[NW-Bound]

We are fortunate to have our IRAs grow to the point that when RMD starts in a few years, we will be permanently in the 24% bracket with just the RMD, and may go up to the 32% in the future when adding other incomes, and if the IRAs continue to grow. That's a nice problem to have!

Because there's no way to avoid 24%, I have been doing Roth conversion into the 24% bracket, while delaying SS. Will have to claim SS in a few months. Yet, I have been paying IRMAA, and forfeit the senior extra deduction.

Meanwhile the IRAs have been growing at several times what I take out for Roth conversions. Roth conversions did not make a big dent. Still a nice problem to have!

So, I am not complaining. If the market crashes to 50% of its current value, and drops me out of the 24% bracket, it's something to complain about.

The Roth conversion works out great, by the way. I now have almost $2M in our Roth, growing tax free. Again, I have nothing to complain about.

 

[pjigar]

Meanwhile the IRAs have been growing at several times what I take out for Roth conversions. Roth conversions did not make a big dent. Still a nice problem to have!

This is why it is important to project your RMD bracket very early in life (i.e. when working). The dollar contributed/converted to Roth earlier has a lot more punch if your current bracket is the same or lower than RMD tax bracket. Of course projecting RMD tax bracket is very difficult the farther out you are from the RMD age but I think it is still worth doing this exercise. We are avid savers/investors for decades and have been maxing out 401k since my second year of working. My projection 4 years ago showed that we will be in the same bracket in RMD as then. So I have been maxing out Roth 401k instead. I do this projection every year and the projected RMD bracket stays on the boundary of 22-24% so I keep contributing to Roth 401k even at our current 24% bracket because I think the tax rate may go up in the future. YMMV.

 

[RetireBy90]

This is why it is important to project your RMD bracket very early in life (i.e. when working). The dollar contributed/converted to Roth earlier has a lot more punch if you your current bracket is the same or lower than RMD tax bracket. Of course projecting RMD tax bracket is very difficult the farther out you are from the RMD age but I think it is still worth doing this exercise. We are avid savers/investors for decades and have been maxing out 401k since my second year of working. My projection 4 years ago showed that we will be in the same bracket in RMD as then. So I have been maxing out Roth 401k instead. I do this projection every year and the projected RMD bracket stays on the boundary of 22-24% so I keep contributing to Roth 401k even at our current 24% because I think the tax rate may go up in the future. YMMV.

If I had it to do over knowing what income and taxes are for us today, I would have done more Roth early on. I took deductions for IRA contributions which turned out to be lower tax rate than we pay today. Alas, more income is a good problem to have. Just a nudge to sometimes it makes sense to pay the tax today and be done with it. If we move to a consumption tax then will have to pay tax again on spending from the Roth but no guarantees here.

 

[PaulR888]

If I had it to do over knowing what income and taxes are for us today, I would have done more Roth early on. I took deductions for IRA contributions which turned out to be lower tax rate than we pay today. Alas, more income is a goodhis problem to have. Just a nudge to sometimes it makes sense to pay the tax today and be done with it. If we move to a consumption tax then will have to pay tax again on spending from the Roth but no guarantees here.

This is a first for me, starting the day with a succession of posters with brilliant strategies, no controversies. Bravo to the above 3 posters!