RMDs are they really something to worry about?

[pb4uski]

^^^ I don't disagree but a fix for the Roth problem is easy peasy... withdraw any amounts over $10 million in 90 days. Fixing ACA subsidies would be really complicated.

Besides, I'd bet that the aggregate cost of ACA subsidies for millonaires is a nit compared to the tax revenue lost on Roth IRAs with balances greater than $10 million.

ETA: In FY 2023 the cost of ACA subsidies was $36.6 billion. If 5% was to underserving millionaires that is only $1.7 billion. Meanwhile, if excess Roth IRA balances are $5 trillion and that money would yield 5% and the income taxed at 20% that would be $50 billion. Totally different orders of magnitude.

 

[mpeirce]

The law of unintended consequences.

And don't mention how HSA's are awesome investment vehicles.

Once our CPA educated me, out HSA has ballooned well into the six figures by investing it well.

Assuming we have some hefty medical expenses some day, it'll be very handy. Worst case, it acts like a tIRA - one that I've been able to add new money into while I'm retired.

 

[Montecfo]

True, all within the rules. But I don't think that when it created tax-free Roth retirement savings accounts that Congress had in mind that people would load it with highly speculative stock that sometimes would end up hitting mega home runs and result in 8 or 10-figure tax-free balances.

If they had thought that far ahead I'm betting they would have said "Hell no!" and included some limitations on it.... which is why if they wanted to amend the law to prevent such abuses going forward I wouldn't have any problem with such a change.

If it were me I would require that any balance greater than $10 million at the end of a calendar year be withdrawn or in-kind transferred to a taxable account within 90 days... or something along those lines. That would remove the tax-free status of most of the megaRoths balances.

While we hear about the home runs, I'm sure we don't hear about the losers.

They clearly did not see a reason to limit Roth IRA size, since they did not limit it in that way. They did limit it in other ways, such as with income limits.

But far more deductions have been lost by taxpayers and gained by IRS than the other way around by folks trying this tax fees jackpot maneuver. Most speculative shares such as pre-IPO investments go to zero, not to the moon.

Only difference is those folks receive no publicity (as you noted).

 

[CardsFan]

^^^ I don't disagree but a fix for the Roth problem is easy peasy... withdraw any amounts over $10 million in 90 days. Fixing ACA subsidies would be really complicated.

Besides, I'd bet that the aggregate cost of ACA subsidies for millonaires is a nit compared to the tax revenue lost on Roth IRAs with balances greater than $10 million.

ETA: In FY 2023 the cost of ACA subsidies was $36.6 billion. If 5% was to underserving millionaires that is only $1.7 billion. Meanwhile, if excess Roth IRA balances are $5 trillion and that money would yield 5% and the income taxed at 20% that would be $50 billion. Totally different orders of magnitude.

I don't disagree, but just for kicks I looked at Roth IRA values. According to the IRS https://www.irs.gov/statistics/soi-...ibution-of-individual-retirement-arrangements there was a total of 1.33 trillion in Roth assets in 2022. So, the excess Roth balances you surmise are probably an order of magnitude less than your number, even if you assume 1/2 of the assets (which I doubt, but have no data to compare) are over $10 million.

But, in any event, I think the points are pertinent. Wealthy, and well to do, folks (and that includes many of us here) find a way to take advantage of quirks in the tax code.

 

[pb4uski]

My bad. I misread the Thiel post as $5 trillion when it was really $5 billion.

But if 5% of that 1.33 trillion in Roth balances represents excess balances over $10 million and it is forced to be distributed, earns 5% and is subject to 20% tax that is $13.3 billion of taxes annually. Still a lot more than 5% of the cost of ACA subsidies.

 

[CardsFan]

I misread the Thiel post as $5 trillion when it was really $5 billion.

Well, that would do it. No harm, no foul. I think we are on the same page.

 

[Koolau]

Two different torpedoes?

My gosh, I'd better do some serious planning, lest the torpedoes sink my boat.

In a different thread, I mentioned the tax bomb that will happen when my I-bonds matured after 30 years, causing a 6-figure compounded interest to become taxable at once.

Two torpedoes + 1 aerial bomb!

So far we haven't even mentioned 2026 I don't think.

 

[NW-Bound]

So far we haven't even mentioned 2026 I don't think.

Thanks for reminding. That's another mortar thrown in the mix.

Through calendar year 2025, taxable ordinary income earned by most individuals is subject to the following seven statutory rates: 10, 12, 22, 24, 32, 35, and 37 percent. At the end of 2025, the rates will revert to those in effect under pre-2018 tax law. Specifically, beginning in 2026, the rates will be 10, 15, 25, 28, 33, 35, and 39.6 percent.

 

[pb4uski]

^^^ I read an interesting hypothesis that the 2017 Tax Act rates will not sunset.

In early 2024 the GOP will introduce legislation to make the 2017 Tax Act rates permanent and force a vote on it. The Dems will reluctantly go along because if they vote against it then the GOP will spin the vote as the Dems voting to increase taxes in the 2024 Congressional elections.

 

[PhrugalPhan]

My bad. I misread the Thiel post as $5 trillion when it was really $5 billion.

But if 5% of that 1.33 trillion in Roth balances represents excess balances over $10 million and it is forced to be distributed, earns 5% and is subject to 20% tax that is $13.3 billion of taxes annually. Still a lot more than 5% of the cost of ACA subsidies.

Maybe I'm not understanding this. 5% of $1.33 trillion is $66.5 billion. 5% of that in earnings would be $3.325 billion. And a 20% tax on that is $665 million (not $13.3 billion). Am I missing something in the calculations?

 

[Time2]

Funny how I can totally grasp how compounding got me to where I am today, but totally fail to grasp where it's going to take me in the future.

Here, this should help.
Compound Interest Calculator

 

[LateToFIRE]

Here, this should help.
Compound Interest Calculator

Thanks - That's a handy calculator. Also noticed useful tabs for PV, CAGR, mortgage, bond yield, etc.!

FWIW, the point I was making was less about "how to", more about my surprise at how substantial the future growth in my pre-tax tIRA/401K accounts could become, and how that could create a rather unpleasant "compounding" tax issue.

 

[lucky penny]

+1. I’m in the same boat as you Penny. When did you retire?

2019

 

[Koolau]

^^^ I read an interesting hypothesis that the 2017 Tax Act rates will not sunset.

In early 2024 the GOP will introduce legislation to make the 2017 Tax Act rates permanent and force a vote on it. The Dems will reluctantly go along because if they vote against it then the GOP will spin the vote as the Dems voting to increase taxes in the 2024 Congressional elections.

Isn't it just grand!!??

 

[pb4uski]

Yup, a very deceitful bunch.

 

[Time2]

RMDs are they really something to worry about?


One situation where they maybe of concern, Say you can easily live in the 12% tax bracket, and you can do that on the SS, pensions, dividends and interest that you receive, but then some or all the RMDs you receive are taxed at 22%. Even that doesn't really matter unless you want to generate generational wealth. Any RMDs you didn't have to withdraw are 10% more because they weren't taxed. (if converted to Roth earlier at 12%) Or even better yet, if you left the funds in taxable accounts let them grow and then live under the limit so they are taxed at 0%. You would still be responsible for any dividends generated during the accumulation phase.
Most of the game is Roth converting in a lower tax bracket than you would be in if you didn't Roth Convert.

 

[Henry Lili]

I started converting at 55 (Fired). With interest rates so yummy high now my taxable income has increased to a point where my conversions will be half of what the had been to stay at an acceptable effective tax rate.