No RMD Problem to Solve?

[sengsational]

I've been dutifully converting tIRA to Roth for a decade. Even having to tippy-toe around PPCAC, I've drained my tIRA. But I still have 401K funds. I've left those funds in there for "ballast", since they're in a low cost, higher yield guaranteed income fund. Although I could make those into tIRA funds and do more Roth conversions, I've actually got another, less common, priority: I've got untaxed gains in a (growth phase) variable annuity. I know alarm bells ring with those "dirty words", but this is a low cost wrapper on Vanguard funds. I have no plans to annuitize. As I understand it, VA's are not added into the RMD calculation. I typed my 401K balance into an RMD calculator and for 8 years, nothing, then at 73, it's only $35K. The split between the 401K and VA funds is 30% 401k, 70% VA. Meanwhile, if you know how VA's work, you know that you have to pull out ALL the gains and only then will the original basis come out tax-free. So the basis is "buried". I've already pulled some money out of the VA and paid taxes on it, and the balance today is still triple the original basis. It's not assured that I'll even be around to see my first RMD, but nothing indicating my wife won't last a good while. So I'm primarly working to optimize across my wife, and two children.

If I've left out anything important, please let me know. If there's enough there to comment upon, what would you think of my plan to pull annually from the VA up to the IRMAA level? That's probably 70% more than we've been spending on ourselves, but we can give the remainder to our kids or try to increase the BTD spending. If I did that for the next 6 or 7 years, I'd uncover the VA basis and have that to spend without paying taxes on it, and the RMD's would be kicking in at that point. I don't see that VA's offer any tax releif after I'm gone, so spreading it out to avoid high tax brackets seems like a reasonable approach.

 

[gauss]

I have an inherited VA that I do indeed plan to liquidate shortly. The annual 1-2% fee plus the fact that any growth will be taxed at ordinary income rates (vs capital gains rates) helps with this decision.

One technicality to mention, some VA's are not included in RMD calculations. Others do require RMDs -- and some others require annual distributions that are called something other than RMD. In your case, assuming that your VA is not held in an IRA and not inherited, then I agree that no RMDs are required.

-gauss

 

[Dalton]

Sounds reasonable. You didn't mention it, so... you could invest (some of) it in a taxable account, too. You don't have to give it (all) away or spend all of it. You'd essentially be gains harvesting, and your heirs would get a step-up.

 

[audreyh1]

Right, a third option is to reinvest it in taxable for the kids later. Draw on it if needed in the meantime. A combination of all three as well.

 

[Koolau]

Sounds like your journey was similar to mine. I also converted all my tIRAs to Roths and kept most of the 401(k) because it had a GIF. That would have w*rked out well except my 401(k) also had a fair amount of old Megacorp stock in it which has taken off like gang-busters. I've been doing RMDs since 71 and I've been taking extra to drain my 401(k) balance (heh, heh, with little effect due to unusual growth of my stock.)

I too had a VA as a tIRA many years back. "Fortunately" it made me very little money and the taxes were easily managed upon liquidation all at once.

Sounds like you are on top of things. Best luck.

 

[sengsational]

Thanks, all, for reading and thinking about my plan. Yes, I do plan to invest some and give some. My sheet that does my rebalancing across all accounts has some proposed positions to keep to my targets.

 

[walkinwood]

Is your Variable Annuity in a 401k or other tax-deferred account? I guess I don't understand how VA's work.

 

[sengsational]

@walkinwood This variable annuity is one purchased with after tax dollars, outside of an IRA or 401k, but it IS a different kind of retirement account under tax law.

The way this one works is you pick your own investment choices (in this case, Vanguard funds). You start out in "growth phase". You don't pay taxes on the gains as they occur. To get money out, you can do two different things. One thing is a withdrawal (they call it "partial surrender", but that's just insurance-speak for withdrawal). The other thing is "annuitize", which is like buying a life annuity. That second option isn't required. It's where, based on the value of your investments, they say "we'll give you X dollars per year for the rest of your life." I don't ever plan to use that...I'll just take withdrawals as needed.

The "gotcha", which I knew when I bought the product, is that you have to take out all of the gains (and pay taxes on those gains), before you have access to the original "basis" (the money you already paid taxes on). So the VA is similar to a tIRA except that the tIRA was limited in how much you could put into it, whereas the VA had no limits. And also the tIRA, the gains come out proportionally. So if your basis is $50 in an IRA and it grew to $100, and you withdraw $10, you pay tax on $5. If a VA basis is $50 and it grew to $100, and you withdraw $10, you pay tax on all $10. And you keep paying tax on 100% of what you take out until you remove all the gains.

 

[MarieIG]

Your plan makes sense.

I have a VA which I had purchased years ago at Vanguard, but has since moved over to Trans America. I'm ignoring it for now, as I want the space for Roth conversions. Between both of our retirement accounts, I don't believe we will be able to complete Roth conversions prior to RMDs. (I'm fine with QCDs, but DH not so much.)

I don't have to withdraw the VA until age 85. I figure, it can be long term care insurance, i.e. we can use it for home health aides, etc. When we reach a certain age, it may be easier to have an additional income stream we don't have to manage. We can leave the Roths, the taxable accounts and what's left of DH's 401k and the IRAs to the kiddos.

 

[SevenUp]

So I'm primarly working to optimize across my wife, and two children.

If you expect most to go to a healthy surviving wife, aggressive VA withdrawals make sense because MFJ rates are lower than S rates.

If you expect most to go to children, it depends on their tax rates vs. yours.

 

[sengsational]

@SevenUp thanks for the tax rate arbitrage thinking. It probably entered my head at some point, but wasn't front and center. I'm glad it doesn't clash with the plan. All of my analysis (I-ORP) has been with the two of us, so automatically included single spouse tax rate, but ignored the kids' rates.