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

[lawman]

This makes my head hurt.

 

[Dtail]

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.

Conceptually, I am with you.
However, a Roth 401k was never offered in my working days and earned too much money to contribute to a Roth.
So in the end, I don't worry about it much and know that no matter how much I convert, my original tax deduction on the TIRA will always be higher than my RMD marginal tax rate.

 

[NW-Bound]

This is why it is important to project your RMD bracket very early in life (i.e. when working).

If I had it to do over knowing what income and taxes are for us today, I would have done more Roth early on.

When still working, our income was too high to qualify for Roth contribution. And Roth 401k was only available to youngin's in 2006. We were already out to pasture.

And frankly speaking, the market growth in the last decade was not anticipated by most. Heck, 10 years ago I was too busy running FIRECalc to see if we could make it, let alone thinking Roth conversion.

The whole shebang may just reverse, dropping us back to the 12% bracket for what I know.

 

[Winemaker]

We saved in our 401k and 403b to avoid the 28% brackets so paying a little into the 24% and up to the top of the 2nd IRMAA isn't that bad. We just limit our investment income to pay under $50 in NIIT.

 

[Time2]

I started Roth conversions at 62 and SS at 70, During the no SS time I was able to maximize IRA distributions to the top of the 12% tax bracket (MFJ). We lived on about 1/2 and Roth Converted the other half. I think I sold off about $600k to $700k of tax deferred and have Roth Converted about $300k to $350k of that. I have mine down low enough, that I'll start concentrating on my younger wife who has about 6 more years to 73.
Having this done will keep me out of the 22% tax bracket when both of our RMDs are due.

 

[stepford]

I still remember when I first heard about backdoor Roth conversions during my working years. I was in the 28-33% tax bracket at the time and I remember thinking, "Nah, why should I? My taxes will surely be less when I'm 60+ years old and retired".

My current self laughs ruefully at my younger self.

 

[junkanoo]

I started Roth conversions at 62 and SS at 70, During the no SS time I was able to maximize IRA distributions to the top of the 12% tax bracket (MFJ). We lived on about 1/2 and Roth Converted the other half. I think I sold off about $600k to $700k of tax deferred and have Roth Converted about $300k to $350k of that. I have mine down low enough, that I'll start concentrating on my younger wife who has about 6 more years to 73.
Having this done will keep me out of the 22% tax bracket when both of our RMDs are due.

Very similar. I'm about 6.5 years older than my wife, who will begin RMDs at 75.

I also started Roth conversions based on the concept that my total was larger and I would reach RMDs (73) much sooner. It seemed to make sense, until I came to the conclusion that I wanted to gift all my tax-deferred assets to charity. Which I will do through QCDs + Will. So, starting last year we started working on her account. I wish I had woken up to my gifting strategy sooner ... but what's done is done.

Even if I wasn't charitably-inclined ... the reality is that I'm likely the first to go. The benefit of being the first to go is that tax-deferred assets can be given to charity or heirs or a combination (as makes sense). The second-to-go has to deal with the reality of being a single filer, hopefully for a long, heathy time.

 

[Amethyst]

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"

Or, your income may have slightly (or more) exceeded the Roth ceiling, which was the case with my late husband and me during most of my working years.

 

[Koolau]

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"

Likely you still have some strategies to employ - like filling your tax bracket with earlier tIRA/401(k) withdrawals and investing the proceeds in taxable. RMDs will likely push you into that next bracket eventually.

You may even be able to make a case for some Roth conversions - even after it's "too late." Sooner or later, you're likely to get RMD'd into a higher tax bracket. If you convert before then, you could call it a "win."

None of this is a suggestion: My suggestion is to run the numbers and examine the RMD tables and make some estimates on your growth within your qualified investments. Just don't give up and accept defeat.

In the mean time, play the IRMAA and maybe NIIT games to your advantage.

Have fun!!

 

[camfused]

I will be "dealing with" my RMDs by doing 100% withholding withdrawals from our IRAs. This pays the big tax bills (don't have to do quarterly payments), and reduces the size of the IRAs, thereby reducing, a bit, subsequent RMDs.

 

[old medic]

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 have used several conversion calculators and they all said there's no big difference doing conversions now . Using Dinkytown tax calculator put in our #s and then kept adding our conversion amount until we cross into 22% and leave a couple $K room. Pay the taxes out of income stream, like adding $15K to the nest egg each year.

 

[PaulR888]

I will be "dealing with" my RMDs by doing 100% withholding withdrawals from our IRAs. This pays the big tax bills (don't have to do quarterly payments), and reduces the size of the IRAs, thereby reducing, a bit, subsequent RMDs.

I understand this is a popular approach. I believe you mean you do this at the end of the year and the Govt considers the payments were made evenly across the year so no penalty, unlike you simply writing a check at the end of the year which would trigger a penalty. Personally, I don't like it. I like taking my RMD in January and not let it continue to grow during the year because this grows my IOU to the IRS too. I don't mind quarterly estimates but someday I plan to pay everything, all my taxes in April and just get it over with.

 

[Dtail]

I understand this is a popular approach. I believe you mean you do this at the end of the year and the Govt considers the payments were made evenly across the year so no penalty, unlike you simply writing a check at the end of the year which would trigger a penalty. Personally, I don't like it. I like taking my RMD in January and not let it continue to grow during the year because this grows my IOU to the IRS too. I don't mind quarterly estimates but someday I plan to pay everything, all my taxes in April and just get it over with.

You could still withhold most of the estimated taxes in the RMD in January, if you can calculate within reason the ultimate tax bill.

 

[audreyh1]

I will be "dealing with" my RMDs by doing 100% withholding withdrawals from our IRAs. This pays the big tax bills (don't have to do quarterly payments), and reduces the size of the IRAs, thereby reducing, a bit, subsequent RMDs.

Interesting approach, however it increases your taxable income just like a Roth conversion would or an RMD would. Once you are subject to RMDs what is the difference?

 

[PaulR888]

Interesting approach, however it increases your taxable income just like a Roth conversion would or an RMD would. Once you are subject to RMDs what is the difference?

I think the allure is to defer paying taxes until the end of the year while not having to deal with quarterly estimated taxes.

 

[PaulR888]

You could still withhold most of the estimated taxes in the RMD in January, if you can calculate within reason the ultimate tax bill.

I guess but I have no idea what my ultimate tax bill is. So with my January RMD I also pay the withholding. And when I see my accountant in March, she calculates an initial Safe Harbor Estimated Tax Schedule and then we reduce it by the January withholdings. There is more than one way to skin a cat. Whatever works for someone, go for it!

 

[camfused]

I think the allure is to defer paying taxes until the end of the year while not having to deal with quarterly estimated taxes.

Exactamundo. Yes, taxes are higher this way, since you pay taxes on the money you withdrawal to pay the taxes, but I *hate* paying taxes and this makes it fairly painless. Plus, you get the added bonus of drawing down the value of your IRA, in case you care about passing it on to your heirs (less taxes for them, eventually).

 

[Time2]

Since retiring I have done most of my withdrawals in December after I see about what my dividends and interest and any other income I have is and poke it into Dinkytown to see what room I have left in the 12% tax bracket. Now that we have started SS, I have to add that in.

 

[Kings over Queens]

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 have an opinion that isn't shared by many on this topic which is to spend down my T-Def money, or at least a good portion of it, first. Granted this will generate taxes but if I'm going to pay the taxes anyway I figure I might as well enjoy the income. My view is it's really no different than a pay check, right? I'm going to have income needs or wants that exceed trying to game the system for ACA subsidies, and the money in our taxable brokerage can go to the kids on stepped up basis.

I haven't figured out how much of my annual income need to fill from the T-def bucket, but anticipate it will be at least more than 50%.

 

[junkanoo]

Exactamundo. Yes, taxes are higher this way, since you pay taxes on the money you withdrawal to pay the taxes, but I *hate* paying taxes and this makes it fairly painless. Plus, you get the added bonus of drawing down the value of your IRA, in case you care about passing it on to your heirs (less taxes for them, eventually).

Naturally, it depends on whether you have other options to pay taxes from, such as a taxable account. The so-called experts recommend paying taxes from your taxable account because of tax drag. However, if your taxable account is quite tax-efficient, then that specific rationale goes away.

However, if I were your heir, I'd prefer that you:

Take the RMD in January and immediately redeploy those assets in tax-efficient assets (that you won't pay much tax on) and (after growth) inherit assets that they won't pay a dime on after getting the step-up. YMMV.

 

[Dtail]

I guess but I have no idea what my ultimate tax bill is. So with my January RMD I also pay the withholding. And when I see my accountant in March, she calculates an initial Safe Harbor Estimated Tax Schedule and then we reduce it by the January withholdings. There is more than one way to skin a cat. Whatever works for someone, go for it!

Absolutely.
I am not an RMD age yet, but manage for my mom. I wait until December due to her IRA having only conservative fixed income investments, plus managing the follow up Rorh conversion, while threading the needle for IRMAA, Senior deduction and NJ State retirement income deduction.
Quite interesting if one is into tax management.

 

[TheWizard]

I have an opinion that isn't shared by many on this topic which is to spend down my T-Def money, or at least a good portion of it, first. Granted this will generate taxes but if I'm going to pay the taxes anyway I figure I might as well enjoy the income. My view is it's really no different than a pay check, right? I'm going to have income needs or wants that exceed trying to game the system for ACA subsidies, and the money in our taxable brokerage can go to the kids on stepped up basis.

I haven't figured out how much of my annual income need to fill from the T-def bucket, but anticipate it will be at least more than 50%.

I tend to agree.
At age 76, I take the majority of my RMD as Ordinary Income. I do QCDs for some of it and a small Roth conversion at year end.

Many folks made good salaries while employed, all taxed as Ordinary Income.
Absolutely nothing wrong with a hefty "salary" in retirement, taxed the same as before.
Same old, same old...

 

[NW-Bound]

I tend to agree.
At age 76, I take the majority of my RMD as Ordinary Income. I do QCDs for some of it and a small Roth conversion at year end.

Many folks made good salaries while employed, all taxed as Ordinary Income.
Absolutely nothing wrong with a hefty "salary" in retirement, taxed the same as before.
Same old, same old...

Well, it is easy for early retirees to clock more than $100K in long-term capital gain and dividends in taxable accounts without taxes. We get spoiled.

When one goes back to paying taxes, it takes some re-adjustments.

 

[old medic]

This is why it is important to project your RMD bracket very early in life (i.e. when working).

Very true, I ran #s yesterday and what little I have converted so far dropped my 1st RMD by $8K. If we don't convert we will cross into the 22% when DW hits RMD.

 

[pb4uski]

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)

So please explain how "Taxes attributed to RMDs)/RMDs" is different from "[(tax with RMD) - (tax without RMD)] / RMD".

They sound like the same thing to me.