RMDs are they really something to worry about?

[Time2]

+1 My oldest sister is in her 80s and her RMD is growing fast..


In your mid 80s the divisor is like 16 or 17...



So, $1 mill div by 16 is $62,500.... at 72 it is about $36,500...

My 98 year old friend has to take out 13.69% this year!

But, I don't know that he has a lot in deferred accounts, he has had to take out over 10% for the last 5 years.

 

[Time2]

Well if people want to be low income retirees, then there are ways of doing that, larger charitable contributions, for instance.

My goal was to be a higher income retiree and I may have achieved that, with Federal income tax exceeding $30,000 the last few years, filing single. State income tax is additional.

That is the rub-- if one partner dies, that leaves the other paying RMDs
on the total deferred, in the single payer tax bracket and Standard deduction.

 

[pb4uski]

.... Also let's not forget we will probably revert back to the higher brackets in 2025. 12% will rise to 15% and 22% will rise to 25%, if it is not renewed.

I would have thought that for Congress to let the 2017 tax act individual income tax rate reductions sunset would be a slam dunk... they take no action and tax rates increase and reduce the budget deficit by an estimated $190 billion annually.

However, I read something a while ago that causes me to question that. It said that those who want to keep the lower rates will propose that the lower rates be made permanent in an election year and for any members who vote against keeping the rates lower they will spin that vote as the member voting for a tax increase... and as a result of that political pressure that making the current rates permanent will pass because the politicians will not want to be accused of voting to increase taxes in an election year.

IOW, the electorate will view voting against making the lower rates permanant as equal to voting for a tax increase. Sounded plausble to me.

 

[pb4uski]

The divisor is growing but the balance is often decreasing.
My RMD for 2023 is less than my RMD for 2022; how could that possibly be?

Wouldn't your RMD for 2023 be less than your RMD for 2022 for the very reasons that you stated?... the divisor is growing and the balance is decreasing due to RMDs (and in 2023 also due to 2022 investment results).

 

[eytonxav]

RMDs are only troublesome if you have a very large tax deferred port, and when combined with SS and pension kicks you to a higher tax bracket. Especially annoying when you don't need all the $s for living.

 

[TheWizard]

To recap a bit, we're really talking about that old Tax Torpedo thing that used to hit around age 70 when both max-delayed SS and RMDs started. It's stretched out more now with RMDs starting at age 73 or later.

With proper planning, you avoid the TT to some degree, by doing good sized Roth conversions for a decade+ prior to age 73. Those annual conversions should be at least as much as your projected SS + RMD will be in future years. So you pay somewhat higher taxes in your 60's to avoid an even worse predicament in your 70s+.

My spreadsheet helped me plan my annual conversions. I just did projections of Adjusted Gross Income from all sources, not trying to replicate income tax brackets on top of that. And it's AGI that matters when dealing with Medicare IRMAA.

Beyond that spreadsheet, I sit down in the weeks after Thanksgiving each year and compute my actual AGI for the current year, including estimated dividends in my taxable account (reasonably accurate).
I then compute a Roth conversion amount for December to bring that AGI up close to, but not over, the next higher IRMAA tier.
For 2022, that approach would have pushed me into the 32% federal tax bracket, so I targeted the top of the 24% bracket for my AGI.

Note: both IRS tax brackets and projected IRMAA tiers for two years hence are adjusted for inflation, but not in a "synchronized" manner.

Now that I'm in my second year of RMDs, I thought I would stop doing Roth conversions, but I still do small ones, less than $10K last December...

 

[target2019]

I don't watch many youtube videos about investing. But the tax torpedo is real. You can predict it several ways. The spreadsheet ot table does not need to be very complicated. I measure things like this (RMD, expected income, pension) in a 10-year spreadsheet that fits on the screen, and can be easily interpreted.

So, we're not panicking or worrying about this. It's just something that will happen, and we can smooth things out to some extent with planning, Roth conversions, and so on.

 

[Koolau]

Speaking of the various tax mines in the FIRE tax minefield, would someone help me review all the possible things to "blow up" our FIRE plans?


1) Surviving Spouse. I think this could be the biggest one though there are lots of ways to ameliorate the situation - with lots of planning (trusts, wills, lawyers stuff.)
2) Pension for survivor. My pension drops to 1/4 for DW when I pass. I did a lot of stuff to ameliorate this as well (insurance and SS at 70, for instance.)
3) I-bonds (His and hers) that begin to expire about the time everything else (income wise) is exploding - like smaller divisor for RMDs (bigger RMDs.) I think other US bonds w*rk like this as well?
4) RMDs - They are pretty small when they start, but they grow progressively bigger over time (especially if your stash continues to grow - good problem to have I guess.)
5) IRMAA - No expert but it seems to me the inflation adjustment is bizarre on these. The numbers used to sound ridiculously high (as in: Well, I'll never have to worry about that.) BUT now I have to worry about that.
6) Tax bracket creep (beyond the issue for survivors - also 2026.)
7) State tax issues - too many to cover
8) Roth(ing) before, during and after. This one can be complicated
9) Balance of Qualified money vs Taxable - (I started with too much tIRA/401(k) and have been w*rking on that issue for 15 years.)
10) Probate/wills/trusts/etc.
11) Taxable SS (probably not a problem - because most of us will pay the max.)
12) Inflation - almost forgot!


I'm sure I've forgotten several things. Anyone care to add to or correct my list?

 

[qwerty3656]

One thing to keep in mind is that your advisor is incentivized to downplay RMDs because the fix reduces your balance and thus their fees.

 

[G-Man]

Most retirees will have been collecting pension and SS before RMDs start, in some cases for many years, so RMD income is truly incremental to pension and SS income as are the resulting taxes.

What is silly is claiming that RMDs are overblown. RMDs start at 73 so nobody in their right mind would defer SS beyond age 70 if they don't "want the additional retirement income" because SS doesn't grow after age 70, so that is ridiculous. Also, I can't conceive of any instance where it would be wise for someone to defer their pension in their 70's so that's a bit silly too.

You can't really control the pension or SS so much other than when it starts within limits, but in many cases RMDs can be either avoided or reduced with better tax planning by doing aggressive Roth conversions between ER and when pensions and SS begin, delaying SS so that one can do more aggressive Roth conversions, etc.

This statement below applies to my situation.

but in many cases RMDs can be either avoided or reduced with better tax planning by doing aggressive Roth conversions between ER and when pensions and SS begin, delaying SS so that one can do more aggressive Roth conversions, etc.

From ER to when 2 pensions kick in (my wife and I) and my wife's SS at age 62, we will in the lower half of the 22% marginal tax bracket. When my SS kicks in at age 70, we will be in the bottom half of the 22% marginal tax bracket.

I'm 57 and my wife is 60. We plan to retire next year (2024).

So, at what point does Roth conversions make sense? From ER to when the 2 pension kicks in and my wife's SS. That would only give me about 2 years of aggressive Roth conversions.

From age 62 to 70 (before my SS kicks in), I probably could do some Roth conversions to fill up the 22% marginal tax bracket.

Now, the question is how I would pay for the additional taxes for the Roth conversions assuming that my taxable accounts has been depleted to bridge the income gap from ER to when the pensions kicks in.

Hopefully everyone follows what I'm trying to say.

 

[Time2]

The RMD thing may or may not be an issue, depending on many factors. The issue I see is that people don't know up front how to play the game and by the time they figure out there is a game - it's too late. I am learning that I didn't know very much going in. Playing catch up is never fun.

I second that thought. I was contributing to an IRA when I was in a lower tax bracket, now I wish I had paid the taxes and had a much larger Roth IRA with no taxes do. Some for me, but more for the wife after I pass and then the kids.
At 68 I have mine whittled down to $200k so less than $8 first year. My wife's is down to $ 300K and she has an extra 5 years to Roth Convert hers down, before her RMDs start. We can only hope that stock market growth makes her RMDs problem!

 

[Chuckanut]

Over the years, I’ve done about all I can to reduce my RMDs. Short of investing to limit my income and perhaps generate losses, I am not certain what else I can do. Letting the tax tail wag the dog does not make sense. It’s a better problem to have than wondering where the next property tax payment will come from.

 

[SevenUp]

From ER to when 2 pensions kick in (my wife and I) and my wife's SS at age 62, we will in the lower half of the 22% marginal tax bracket. When my SS kicks in at age 70, we will be in the bottom half of the 22% marginal tax bracket.

Is there a typo here? E.g., should the first "22%" be "12%"?

I'm 57 and my wife is 60. We plan to retire next year (2024).

So, at what point does Roth conversions make sense? From ER to when the 2 pension kicks in and my wife's SS. That would only give me about 2 years of aggressive Roth conversions.

She could delay SS in return for higher payments when she does start. Do you have a similar choice with the pensions, or is there no benefit to deferring so you might as well start those ASAP?

Now, the question is how I would pay for the additional taxes for the Roth conversions assuming that my taxable accounts has been depleted to bridge the income gap from ER to when the pensions kicks in.

You pay by withholding from the age 59.5+ person's conversion. Does that make sense? If not, what is unclear?

 

[rk911]

we don't need the income so 100% of our RMDs go either to our DAF and/or to a QCD.

 

[jollystomper]

I do not "worry" about future RMDs, but I do analyze what there impact will be when I have to start taking them about as well as when there is just one of us (likely DW) in the future.I will not have enough room in our current tax bracket to convert much of my 401K and IRA before RMD age (not a complaint, good pension and investment returns), but I do what I can. At least I have completed converting DW's traditional IRA to Roth, so one less account to worry about .

My simple plan is too look at it year by year to determine how much Roth conversions I can do, based on the income for that year. Beyond that, don't worry, be happy . I "comfort" myself with the fact that whatever tax is due from the RMD can be paid from the RMD and not impact our retirement lifestyle.

 

[pb4uski]

One thing to keep in mind is that your advisor is incentivized to downplay RMDs because the fix reduces your balance and thus their fees.

Not really since in most cases the fix is Roth conversions which in most cases just move money from a tIRA to a Roth IRA at the same brokerage. I did mine this morning and it was just an in-kind transfer of two securities from my tIRA to my Roth IRA based on fair values as of today's closing.

 

[G-Man]

Is there a typo here? E.g., should the first "22%" be "12%"?

She could delay SS in return for higher payments when she does start. Do you have a similar choice with the pensions, or is there no benefit to deferring so you might as well start those ASAP?

You pay by withholding from the age 59.5+ person's conversion. Does that make sense? If not, what is unclear?

Sorry for the confusion.

The 22% marginal tax bracket is $89,451 to $190,750.

From ER to when 2 pensions kick in and SS at age 62 for my wife, that will be about $115K per year.

When my SS kicks in at age 70 for me, that will be about $170K per year.

There is no benefit for delaying pension at age 60 for me and at age 62 for my wife.

So, what account would I use to the pay the Roth taxes. Would I pay the taxes out of the Roth dollars that was converted? For example, if the Roth conversion amount is $50K and taxes is $10K, and I pay the taxes from the Roth dollars, my Roth ending balance is $40K.

 

[pb4uski]

This statement below applies to my situation.

but in many cases RMDs can be either avoided or reduced with better tax planning by doing aggressive Roth conversions between ER and when pensions and SS begin, delaying SS so that one can do more aggressive Roth conversions, etc.

From ER to when 2 pensions kick in (my wife and I) and my wife's SS at age 62, we will in the lower half of the 22% marginal tax bracket. When my SS kicks in at age 70, we will be in the bottom half of the 22% marginal tax bracket.

I'm 57 and my wife is 60. We plan to retire next year (2024).

So, at what point does Roth conversions make sense? From ER to when the 2 pension kicks in and my wife's SS. That would only give me about 2 years of aggressive Roth conversions.

From age 62 to 70 (before my SS kicks in), I probably could do some Roth conversions to fill up the 22% marginal tax bracket.

Now, the question is how I would pay for the additional taxes for the Roth conversions assuming that my taxable accounts has been depleted to bridge the income gap from ER to when the pensions kicks in.

Hopefully everyone follows what I'm trying to say.

Yes, I follow you. Roth conversions may not work in your circumstances after the two pensions kick in.

You say that with pensions you will be in the 22% tax bracket but with pensions and SS that you still be in the 22% tax bracket. If you add RMDs on top of pensions and SS I presume that you'll be in either still in the 22% bracket or perhaps in the 24% tax bracket. If that is the case then there is little punch to Roth conversions.

They have more impact when the difference between the adjacent tax brackets are more extreme... like 12% vs 22% or 24% vs 32%.

However, another important consideration that I have found difficult to factor in is if one of us dies prematurely, the surviving spouse will thrust into a horrendously high tax bracket when RMDs start.

It is best to pay Roth conversion taxes out of cash flow or taxable funds if possible... if that isn't possible then from withholdings on the conversion.

 

[G-Man]

Yes, I follow you. Roth conversions may not work in your circumstances after the two pensions kick in.

You say that with pensions you will be in the 22% tax bracket but with pensions and SS that you still be in the 22% tax bracket. If you add RMDs on top of pensions and SS I presume that you'll be in either still in the 22% bracket or perhaps in the 24% tax bracket. If that is the case then there is little punch to Roth conversions.

They have more impact when the difference between the adjacent tax brackets are more extreme... like 12% vs 22% or 24% vs 32%.

However, another important consideration that I have found difficult to factor in is if one of us dies prematurely, the surviving spouse will thrust into a horrendously high tax bracket when RMDs start.

It is best to pay Roth conversion taxes out of cash flow or taxable funds if possible... if that isn't possible then from withholdings on the conversion.

From ER to when 2 pensions kick in and SS at age 62 for my wife, that will be about $115K per year.

When my SS kicks in at age 70 for me, that will be about $170K per year. When I add RMDs in starting at age 75, it will take me to the 24% marginal tax bracket. All depends on what the tax brackets will be in when I turn 75. That is 18 years from now.

 

[SevenUp]

Sorry for the confusion.

The 22% marginal tax bracket is $89,451 to $190,750.

If both "22%"s were correct, then it appears the typo was using "bottom" instead of "upper" when describing the half of the 22% bracket you would be in after your SS kicks in at age 70 - is that correct?

From ER to when 2 pensions kick in...

So you will have $115K/yr income between the time you retire and the 2 pensions kick in? In other words, the pensions will add to the $115K/yr?

So, what account would I use to the pay the Roth taxes. Would I pay the taxes out of the Roth dollars that was converted? For example, if the Roth conversion amount is $50K and taxes is $10K, and I pay the taxes from the Roth dollars, my Roth ending balance is $40K.

You are over-complicating this.
Yes, the Roth ending balance will be $40K, but you don't need to convert all $50K, then withdraw from the Roth account. Just have the brokerage withhold (i.e., send to the IRS) $10K out of the $50K coming from the traditional account.

Does that make sense?

 

[steelyman]

I’m in a similar situation in that my pension income places me in the 22% bracket.

I don’t do conversions but I try to keep an even split between tax-deferred and tax-free funds in my retirement accounts. Some years that results in withdrawals from tax-deferred.

My withdrawals are voluntary (have not reached RMD age).

 

[G-Man]

If both "22%"s were correct, then it appears the typo was using "bottom" instead of "upper" when describing the half of the 22% bracket you would be in after your SS kicks in at age 70 - is that correct?

So you will have $115K/yr income between the time you retire and the 2 pensions kick in? In other words, the pensions will add to the $115K/yr?

You are over-complicating this.
Yes, the Roth ending balance will be $40K, but you don't need to convert all $50K, then withdraw from the Roth account. Just have the brokerage withhold (i.e., send to the IRS) $10K out of the $50K coming from the traditional account.

Does that make sense?

Correct. I shoud have used upper/top of the 22% marginal tax bracket when SS kicks in at age 70 for me.

The $115K will include 2 pensions and my wife's SS at age 62. My pension starts at age 60 and my wife pension starts at age 62. Our current age is 57 for me and 60 for my wife.

 

[NW-Bound]

I have been concerned about this (the higher taxes not the pool boy) for quite a while. If a smart pool boy is the answer once I am gone then more power to her.

Cheers!

If our widows get the attention of a pool boy, he will help them BTD, taxes be damned. Withdraw it all in one year. Problem solved.

RMDs are only troublesome if you have a very large tax deferred port, and when combined with SS and pension kicks you to a higher tax bracket. Especially annoying when you don't need all the $s for living.

Hear, hear... I am delaying SS till 70 (not too far off). And with both SS, we don't need a whole lot from the stash. Both my wife and I have 7-figure tax deferred accounts.

And the other day, I realized that when the I bonds from the early 2000s mature after 30 years (10 years from now), that's a big tax bomb, although who knows if I am still alive then. This brings us to the point that perhaps one should not worry too much about taxes.

But seriously, if we care to optimize the taxes for all cases including for the single survivor spouse, then it makes more sense for me to do Roth conversion to the top of the 24% bracket instead of the 22%.

The reason is that if the market tanks, and it turns out that I could have paid only 22%, that's a loss of 2% instead of the opposite case of me croaking early and my wife paying 35% as a single filer.

 

[PatrickA5]

Whether they are or not will depend on each person's situation.

The video makes the first of the Common misconceptions described there: comparing marginal tax rates vs. effective tax rates.

That will make traditional look better than it is. Still might be better than Roth - again, it depends... - but not that much better.

+1 Yeah he compares the marginal rate (during contributions) to the overall effective rate during RMD's. That may be an OK way of looking at it, but probably misleading - depending on one's actual income in retirement.

For some reason, he's also calculating a single years tax divided by the entire balance of a 401K and getting some (almost meaningless) number of .70% and trying to compare that to people complaining about having to pay 30% of their balance in taxes.

Despite the flaws, for many (most?) people, RMDs indeed won't be a big deal considering the average person doesn't have huge tax deferred balances.

 

[Montecfo]

I'd say it is hard to generalize about the importance or RMDs since it is so person specific.