RMD Folks how are you using the money

[rodi]

I have an inherited/beneficiary IRA that I take RMDs from, even at my tender age of 56. It is part of our income stream for now. If I had to take more than we needed (I don't currently) then the excess would go to a taxable account.

DH will hit RMDs in 3 years. It will also be part of our income stream, reducing what we need from other sources.

In the meantime, since I have time, and am not unaware (unlike some other posters here) I am converting some of my IRA money to ROTH each year - hoping to reduce the RMDs some, when I hit 70.5.

Agreeing with ERD50 - money is fungible. But taxes can be managed with forethought.

Taxes are part of my overall spending. Anticipating the potential for higher taxes later when I am 70.5 and on SS, I am paying lower taxes now for everything I ROTH convert.

If I buy a lexus - it will come out of my overall spending.... If I pay taxes it comes out of my overall spending. If I pay a utility bill or pay for a vacation.... it comes out of my overall spending. We can plan our spending, we can plan for taxes... and as ERers we should have a plan for it all.

 

[hesperus]

And now, here I am, 70 and retired. How could this be? Who woulda thunk?

Except I had to start taking them at 51, eight years ago, since it wasn't a trad IRA.

 

[Walt34]

In practice, I don’t believe many folks pay 50% penalties from what I’ve read. The IRS does show some leniency if you try to correct things and file the forms ASAP.

I've read the same thing - I think there's even a special form for it, in effect saying "Oops, sorry, and I won't do it again" and the 50% penalty is lifted. But this only works one time.

 

[meierlde]

That is the RMD problem for many. They are forced to take out money they might not need, pay taxes they may otherwise not pay, including taxes on their Social Security they may have never had to pay before. And on top of that, because of draconian RMD IRS rules, many seniors may need to employ tax professionals for the first time. And as others here have posted, RMD might also cause their Medicare B premiums to increase.

It might be life as usual for you... but for others it could be quite a culture shock.

.

Actually if you have the money in an IRA at Vanguard or their competitors, they have an automatic RMD service that will tell you how much to withdraw, and even withdraw it https://personal.vanguard.com/us/whatweoffer/accountservices/requiredminimumdistribution


Just did an IRA withdrawal at Vanguard, and if you just transfer to your taxable account, you can do it online and if you move the money to the settlement account, you can have some withheld.

While not quite to RMD age, I have been in the old 25% bracket and RMDs will push me into the 33% bracket. So for the 3 years till rmds I have decided to withdraw enough to use up the 22 and 24% brackets (I file single). At least a little relief.



Also it is fairly simple in turbotax etc. You enter the information from the 1099 R and it takes care of it. Now if you have money in a 401k recall that QCD does not work in a 401k so you might want to roll it over.


Spending the first year on converting most light fixtures to led based fixtures, adding a few storm doors, tiling the kitchen, and a few other things.


Having no children and being single gifting my family makes sense since they likley will get most of it eventually.

 

[street]

I have an inherited/beneficiary IRA that I take RMDs from, even at my tender age of 56. It is part of our income stream for now. If I had to take more than we needed (I don't currently) then the excess would go to a taxable account.

DH will hit RMDs in 3 years. It will also be part of our income stream, reducing what we need from other sources.

In the meantime, since I have time, and am not unaware (unlike some other posters here) I am converting some of my IRA money to ROTH each year - hoping to reduce the RMDs some, when I hit 70.5.

Agreeing with ERD50 - money is fungible. But taxes can be managed with forethought.

Taxes are part of my overall spending. Anticipating the potential for higher taxes later when I am 70.5 and on SS, I am paying lower taxes now for everything I ROTH convert.

If I buy a lexus - it will come out of my overall spending.... If I pay taxes it comes out of my overall spending. If I pay a utility bill or pay for a vacation.... it comes out of my overall spending. We can plan our spending, we can plan for taxes... and as ERers we should have a plan for it all.

Okay so what you are saying is If I pay 30K in taxes then that amount would be considered in my WR to get my true WR. I hope I explained that so it can be understood.

 

[audreyh1]

I agree, but wish I knew more about the play between Roth, TIRA and Taxable accounts back then, so could have made better investment decisions as to allocation between the 3 vehicles.

I think 2010 was the first year someone could covert a traditional IRA to a Roth regardless of income. Well, if it had been an option earlier, we might have done it during the 2000s, also when our IRAs were smaller. By 2010 our investment income was pushing us into higher brackets.

I think people forget how some of the rules changed along the way. Roth was not an option when I was working, otherwise I would have taken advantage. Also, IRA contribution limits, especially for older folks, were raised substantially after I retired.

I’m not complaining. As it happens, our IRAs are perhaps 13% of our retirement assets, so we were comparatively low to begin with. So even though our RMDs will probably be taxed harshly, it could have been way worse, I suppose.

 

[mpeirce]

I’m in the “money is fungible” camp and don’t see it affecting our budget at all.

I can imagine using (part of) the RMD for (already budgeted) charity giving since there is a tax angle there. That assumes we’ve used up the DAF we funded last year.

 

[meierlde]

I think 2010 was the first year someone could covert a traditional IRA to a Roth regardless of income. Well, if it had been an option earlier, we might have done it during the 2000s, also when our IRAs were smaller. By 2010 our investment income was pushing us into higher brackets.

I think people forget how some of the rules changed along the way. Roth was not an option when I was working, otherwise I would have taken advantage. Also, IRA contribution limits, especially for older folks, were raised substantially after I retired.

I’m not complaining. As it happens, our IRAs are perhaps 13% of our retirement assets, so we were comparatively low to begin with. So even though our RMDs will probably be taxed harshly, it could have been way worse, I suppose.

Perhaps a better way to compare is to look at the tax rates in the 80s and 90s and consider how much less you will pay now compared to the tax rates back then. Recall that in 1980 the top tax rate was 70% and it is about 1/2 that now.

 

[Hermit]

Understanding the options for RMDs made a big difference in tax planning to me. I originally had a six figure amount stashed in a taxable bank account earmarked for a special project at my favorite charity. The project timing has slipped to the right. I told the charity it would make a very large difference in money transfered to the government if that money was transfered as QCDs after I turn 70.5. It will work for the project and will increase the amount they get so they agreed. It is a win for me by freeing up cash for current needs. Everyone is happy.

 

[audreyh1]

Perhaps a better way to compare is to look at the tax rates in the 80s and 90s and consider how much less you will pay now compared to the tax rates back then. Recall that in 1980 the top tax rate was 70% and it is about 1/2 that now.

Yes, I was paying higher taxes in the 80s, as I was in that weird “surcharge” group that paid 33%, I think, after the Reagan tax changes. Tax rates went back down above that in the next higher bracket. Bizarre.

I don’t remember my marginal rates during the 90s.

 

[Perryinva]

I’m with ERD50; its part of the portfolio. How to reduce them is another question. Tax implications are another question. I stopped making deferred deductions this year now that the marginal is 22% for us (barely). Lowest marginal rate I’ve had in many many years.

 

[eytonxav]

RMDs will hit us next year, as will DW's small pension, and the year after that she will start SS. I am already collecting SS, plus we use my IRA for living expenses. We are going to be hit with much larger withdrawals due to my RMD and most likely will spend some, save/reinvest some and gift some to the kids.

 

[Golden sunsets]

I don't remember exactly when ROTH 401K's became an option, but at the time we decided that we would not bother to start splitting our contributions between Roth and Tax deferred, as there was so little time left before retirement. I'll admit I'm jealous of those who have Roths. But I am relieved to say, that the rationale for pumping as much into tradiational IRA's and then 401K's, because- "you'll likely be in a lower tax bracket in retirement, when RMD's hit", has turned out to be true, now that the tax code has changed the marginal tax thresholds. There was a time that I wondered if we would be in a lower tax bracket.

 

[MJ]

I think 2010 was the first year someone could covert a traditional IRA to a Roth regardless of income. Well, if it had been an option earlier, we might have done it during the 2000s, also when our IRAs were smaller. By 2010 our investment income was pushing us into higher brackets.

I also started converting my trad IRA to Roth up to an amount that would keep me in the 15% tax rate. I had the additional advantage of living overseas so I didn't have to pay any state income tax. Now I have a nice chunk of Roth money earning me tax free income which I don't need.

 

[audreyh1]

I don't remember exactly when ROTH 401K's became an option, but at the time we decided that we would not bother to start splitting our contributions between Roth and Tax deferred, as there was so little time left before retirement. I'll admit I'm jealous of those who have Roths. But I am relieved to say, that the rationale for pumping as much into tradiational IRA's and then 401K's, because- "you'll likely be in a lower tax bracket in retirement, when RMD's hit", has turned out to be true, now that the tax code has changed the marginal tax thresholds. There was a time that I wondered if we would be in a lower tax bracket.

Roth IRAs were created in 1997. Our income was too high to contribute, so missed that boat. We might have been able to do some conversions during the but the income limit prevented that. The income limit was dropped in 2010. But our marginal tax rate was higher then, mainly due to AMT, so we hadn’t had the opportunity.

Since the 2018 tax changes we are no longer subject to AMT, but would be pushed into higher Medicare brackets for 2020 from Roth conversion this year. I’ll take another look later this year.

In general, it seems that the amount we can convert is small compared to what will still remain, and our IRAs are only 13% of our retirement assets, so it rarely seems worth all that trouble. I’ll probably default to the attitude of enjoying lower taxes now, and in the future come what may.....

 

[scrabbler1]

I don't have any RMDs yet, but my friend does. (He's the snake-bit one I have written about from time to time.) I help handle his portfolio and it includes taking the RMD from an inherited IRA he got, along with half of a large brokerage account, back in 2012. He doesn't need the ~$3,000 from the RMD, so we use it to pay income taxes on the investment earnings the inherited brokerage account spins off. Some years it paid all the extra the state income taxes but not the federal income taxes. Other years, it paid all the taxes so he took the rest as cash which helped fund his annual Roth IRA purchase.

 

[Dtail]

I think 2010 was the first year someone could covert a traditional IRA to a Roth regardless of income. Well, if it had been an option earlier, we might have done it during the 2000s, also when our IRAs were smaller. By 2010 our investment income was pushing us into higher brackets.

I think people forget how some of the rules changed along the way. Roth was not an option when I was working, otherwise I would have taken advantage. Also, IRA contribution limits, especially for older folks, were raised substantially after I retired.

I’m not complaining. As it happens, our IRAs are perhaps 13% of our retirement assets, so we were comparatively low to begin with. So even though our RMDs will probably be taxed harshly, it could have been way worse, I suppose.

I was in a high tax bracket from 2010 until I retired, so now don't feel bad that I could have done conversions or contribute in prior years.
So thanks for that info.

 

[Clone]

He doesn't need the ~$3,000 from the RMD, so we use it to pay income taxes on the investment earnings the inherited brokerage account spins off.

I have done that with the inherited IRA RMDs also. 80% to Federal withholding, 15% to State. Easy way to put some money into withholding at the last minute if it looks like you might come up short.

 

[Helena]

I help handle his portfolio and it includes taking the RMD from an inherited IRA he got, along with half of a large brokerage account, back in 2012. He doesn't need the ~$3,000 from the RMD, so we use it to pay income taxes on the investment earnings the inherited brokerage account spins off. Some years it paid all the extra the state income taxes but not the federal income taxes. Other years, it paid all the taxes so he took the rest as cash which helped fund his annual Roth IRA purchase.

I had the additional advantage of living overseas so I didn't have to pay any state income tax.

I'm glad I live in Texas [no state income tax.]

It's bad enough paying the extra RMD federal tax
[including tax on SS.]

.

 

[aja8888]

SS covers 60% of our spending, RMDs cover the rest. Cash in emergency account covers stuff that "happens".

No pensions here, government or otherwise.

 

[bw5972]

I have some years left before I'm required to take MRD. My question is to you folks that are getting them now are you reinvesting, spending it and what have you been doing with these large sums of money?

Why would the initial RMD be a "large sum of money"? I would think it would be less than most normal yearly withdraw amounts. Thus the RMD could constitute just a part of ones normal withdrawl.

 

[Katsmeow]

My mom recently died and I am beneficiary of her IRA. It will be an inherited IRA for me. Because she had not taken her RMD for this year (she was in her 90s), it will be distributed to me (based on her life expectancy for this year only). I do not need this money for this year for living expenses. But, I must take it. I do still have some money that I was needing to withhold for taxes either through a distribution from DH's IRA or by paying estimated taxes.

So, instead of that I have asked the custodian to withhold 100% of the money from the RMD for income taxes. I asked and it is OK to do that. I was told to write on the form that, yes, I really did want to withhold 100% of the money (about $2500) for taxes.

DH had to take RMDs this year for the first time. That simply went into our checking account for living expenses.

Next year I will have to take an RMD from the inherited IRA but it will be a relatively small amount of money as it will be based upon my age and it will just go to general expenses most likely.

 

[Souschef]

Why would the initial RMD be a "large sum of money"? I would think it would be less than most normal yearly withdraw amounts. Thus the RMD could constitute just a part of ones normal withdrawal.

The reason is right now my RMD is 5.5% of a large IRA, that I normally do not ever touch. Right now it is about equal to the total of our SS and pensions.
This impacts the taxing of our SS and puts us in a much higher tax bracket.

 

[meierlde]

The reason is right now my RMD is 5.5% of a large IRA, that I normally do not ever touch. Right now it is about equal to the total of our SS and pensions.
This impacts the taxing of our SS and puts us in a much higher tax bracket.

At 70.5 the RMD is 4% for singles couples of roughly equal ages, increasing to 5% at 78 6% at 83 7% at 86 8% at 89 10% at 93 etc. the table given here
IRA Required Minimum Distribution Worksheet




gives the number of years of life expectancy, and you divide you jan 1 amount by that number.

 

[RobbieB]

I was a little worried when I ran one of the calculators on this and saw I had a lot of dough to deal with.

I dunno. Wrong calculator, user error, I dunno. The table (worksheet) gives me a much more sensible number about 1.5 X what my SS benefit will be at FRA.

Good to know. Not worried anymore. More dough to blow -