RMDs are they really something to worry about?

[rayvt]

However, you may have the ability to avoid or rather reduce your taxes on RMDs (advance roth conversions, etc.) and therefore that’s the component that’s “incremental” and not overblown.

The IRS owns ~25% of what is in your IRA. They fully intend to get it, and are patient as to when they get it. Every withdrawal you make, whether it's an RMD or a normal withdrawal will get taxed. Doing ROTH conversions just means you pay the tax now rather than later.

Even if you could manage to avoid RMDs entirely or minimize them, your heirs will be paying the tax. And they have to empty the IRA in just 10 years.

Yes, the fears of RMDs are overblown, and they are not really something to worry about.

 

[harllee]

RMDs are not a problem for DH and I --we give to charities from our IRAs using the QCD rules so we have to take very little in RMDs.

 

[SecondCor521]

I really want to thank you all for this thread. It has given me food for thought. I'm lazy and tend to be a "set it and forget it" person when it comes to retirement planning and investing. I have not done Roth conversions during retirement so far because of the ACA thresholds and sheer laziness. I always planned to just let the RMDs and the resulting tax be whatever it would be. As it turns out, I'll likely be in a lower tax bracket for the RMDs. I checked and it looks like for more than half the years from 2001 to 2010 I was in the 33% tax bracket and one year even hit the dreaded AMT. For the last few years of that I did the catch-up contributions to my 401k, so, yeah, I way over-contributed to my 401k. I'm thinking now that I may start taking distributions from my 401k up to the top of the 22% bracket, even though I don't have an immediate need for the $. Still working on that idea. Stay tuned, I may be asking some questions around that.

You might find it useful to roll your 401(k) into a traditional IRA and then do Roth conversions up to the top of the 22% bracket. That way the distributions grow and are distributed tax free rather than being put into taxable where the income and capital gains would be taxed.

 

[Henry Lili]

You might find it useful to roll your 401(k) into a traditional IRA and then do Roth conversions up to the top of the 22% bracket. That way the distributions grow and are distributed tax free rather than being put into taxable where the income and capital gains would be taxed.

Given higher interest rates RMDs make less sense for me now. Started three years ago at 54 (I'm FIREd) when cash was trash. Now. My cash is throwing off significant income, CDs etc. Nice problem to have but it bumps me up to the next tax bracket in a big way. I do quarterly conversions and ran this year's tax numbers a couple days ago and will likely take a pause for the remainder of 2023.

 

[pb4uski]

The IRS owns ~25% of what is in your IRA. They fully intend to get it, and are patient as to when they get it. Every withdrawal you make, whether it's an RMD or a normal withdrawal will get taxed. Doing ROTH conversions just means you pay the tax now rather than later.

Even if you could manage to avoid RMDs entirely or minimize them, your heirs will be paying the tax. And they have to empty the IRA in just 10 years.

Yes, the fears of RMDs are overblown, and they are not really something to worry about.

In many cases you are right, but I have a low to middle income friend who avoided tax when he deferred income to his tax-deferred account and will pay no tax on withdrawals so for many low to middle income people it is a bonanza.

 

[RetMD21]

You mean, the same "higher" tax revenues/brackets that I pay and then pay IRMAA on top of it... Somehow that doesn't make me feel any better.

So you think more of your part B should be subsidized by general tax revenues?

I also didn't understand that the Medicare tax deducted from pay is for part A only and part B is funded differently.

 

[rayvt]

In many cases you are right, but I have a low to middle income friend who avoided tax when he deferred income to his tax-deferred account and will pay no tax on withdrawals so for many low to middle income people it is a bonanza.

Yes, that's right. But I doubt that many of us here were low to middle income people. People with low(ish) income don't have the money to put significant sums into an IRA, so there's not a whole lot of money in the IRA so the RMDs are small.
(Although I still regret not buying 1 share of BRK in my IRA when I had $2000 in it, because $2000 for one share of a stock is crazy.)

It's the same old problem as the "take SS at 62 or 70?" question. Poor people need the SS income as soon as they retire. Rich people don't need the SS income at all. It's only the small cohort of people in the middle

If you don't have a large IRA, then you don't need to fret about RMD. If you have a large IRA balance, then you are a winner at life's lottery and the extra tax is not a big deal.

 

[Morgan22]

I really want to thank you all for this thread. It has given me food for thought. I'm lazy and tend to be a "set it and forget it" person when it comes to retirement planning and investing. I have not done Roth conversions during retirement so far because of the ACA thresholds and sheer laziness. I always planned to just let the RMDs and the resulting tax be whatever it would be. As it turns out, I'll likely be in a lower tax bracket for the RMDs. I checked and it looks like for more than half the years from 2001 to 2010 I was in the 33% tax bracket and one year even hit the dreaded AMT. For the last few years of that I did the catch-up contributions to my 401k, so, yeah, I way over-contributed to my 401k. I'm thinking now that I may start taking distributions from my 401k up to the top of the 22% bracket, even though I don't have an immediate need for the $. Still working on that idea. Stay tuned, I may be asking some questions around that.

Why not roll your 401k over to a rollover IRA and start doing Roth conversions up to the top of the 22% bracket instead? (Since you say you have no need for the funds.)

 

[Exchme]

I don’t mind the income tax on RMDs, but i think the way they handle IRRMA is down right unfair. One dollar over the limit results in a huge Medicare tax increase. We have computers that can calculate a more fair way of doing that. Just my 2¢.

Overall, I regard any income tax on RMDs to be a success tax.

+1

Just like the ACA cliff that is now a ramp, they could just make it about 5% of everything above the base level and capped at whatever income makes the maximum Medicare cost work out the same as today. The annoying part for tax planning is the tiers and the not knowing whether you've crossed them until two years later.

 

[Car-Guy]

So you think more of your part B should be subsidized by general tax revenues?

No....

 

[SunGuy]

There's a lot of cool things you can do to minimize taxes, most people should avoid most life insurance/annuity scams, but a few for rich people can help them have a 0% tax bill.

The Power of Zero by David McKnight goes over a lot of it.

 

[EarlyandLate]

Why not roll your 401k over to a rollover IRA and start doing Roth conversions up to the top of the 22% bracket instead? (Since you say you have no need for the funds.)

1. There are Federal legal protections for 401ks that do not exist for IRAs.
2. I really do not need any additional growth in the retirement portion of my portfolio. (I am very blessed.)
3. If the money builds up in my checking account, I'll probably be more motivated to do nice things for others. (I have donated appreciated stock before, but filling out the forms is more work than just writing a check. I told you I'm lazy when dealing with money!)

4. Maybe in the next five years or so, I'll move to one of my dream locations for the next chapter of retirement and housing in those places is more expensive than here. The timing of this is not fully in my control, so having a pile of cash to plop down would be handy. The last two homes I have bought have been cash straight out of my checking account. It's so easy!

5. Although I'll likely leave a large sum behind when I leave this earth, I have no reason to want do so.

 

[Imackenzie]

Also, you can start taking money out of tax deferred accounts at age 59-1/2, either as ordinary income or as Roth conversions.
Waiting until age 72+ when distributions from those accounts are REQUIRED is a mistake if you have a large balance...

Don't forget it's actually age 55 for 401(k) plans, not 59.5 like IRAs.

 

[pb4uski]

^^^ Be careful with that because it gets tricky. It is 55 only if you terminate service for the employer sponsoring that 401k in the year that you turn 55. But if you left the employer sponsoring that 401k before the year that you turned 55 then it is 59-1/2.

Workplace retirement plans are designed to help workers save for their twilight years. Ordinarily, you can’t withdraw money from these plans before age 59½ without facing a 10% early withdrawal penalty. This rule is only waived when certain exceptions apply and the rule of 55 is one of them. IRS guidelines allow workers to pull money from their 401(k) or 403(b) plan early without a penalty if both of the following are true:

• Withdrawals occur in the year the worker turns 55 or later
• Withdrawals occur after leaving your employer

For example, say that just after your 55th birthday, your company decides to downsize and eliminates your position. The rule of 55 would allow you to take money from your 401(k) or 403(b) without having to pay the 10% early withdrawal penalty.

However, you don’t have to be downsized or fired to apply the rule of 55. You could also take advantage of it if you decide to retire early or simply want to change jobs later in your career.

Soruce: https://www.investopedia.com/rule-of-55-5324286

 

[Morgan22]

1. There are Federal legal protections for 401ks that do not exist for IRAs.

^^ This depends. Some states provide the same protections for IRAs.
Just letting you know.

 

[Imackenzie]

Good point!

^^^ Be careful with that because it gets tricky. It is 55 only if you terminate service for the employer sponsoring that 401k in the year that you turn 55. But if you left the employer sponsoring that 401k before the year that you turned 55 then it is 59-1/2.

I didn't know that because when I looked into it I was planning to quit so it never came up. Every time I think I know what I'm talking about when it comes to taxes, some other subsection bites me!

 

[Koolau]

That would make me very unhappy!

That would make many of us unhappy. I'll say no more.

 

[Koolau]

Agree

No reason to worry about RMD, the Tax Man cometh no matter what. Pay now or pay later.
Just like age of death, you can only guesstimate what future tax rates may be.

Do what works for you.


My skeptical little brain thinks Roths have a possibility of being taxed in the future, based on income. Blasphemy, I know.

That's why I shiver every time I hear of "VAT" or similar taxes. Stealth tax on Roths.

 

[Koolau]

Once i found out that Medicare part B premiums are heavily subsidized by general tax revenues I stopped being angry about paying IRMAA.

Wouldn't say I'm not a bit angry about IRMAA (too abrupt - $1 over) BUT you're right how much it's subsidized - but not just by gummint. Also by everyone who's not on it.

 

[ncbill]

1. There are Federal legal protections for 401ks that do not exist for IRAs.

As long as you don't add any new contributions, an IRA "rolled over" from a 401k plan enjoys the same federal protections as the 401k account.

Biggest advantage of leaving money in an old 401k is the ability to tap it under certain conditions starting at age 55 instead of 59 1/2.

 

[audreyh1]

As long as you don't add any new contributions, an IRA "rolled over" from a 401k plan enjoys the same federal protections as the 401k account.

Biggest advantage of leaving money in an old 401k is the ability to tap it under certain conditions starting at age 55 instead of 59 1/2.

Interesting. Didn’t know that. That’s what I did. It’s designated as a rollover back then in case I had another job and wanted to move to their 401K as advised by Fidelity.

 

[Exchme]

That's why I shiver every time I hear of "VAT" or similar taxes. Stealth tax on Roths.

I would quibble on one detail. These are equal-opportunity schemes to confiscate a portion of all kinds of savings, not just Roths.

 

[RetMD21]

Wouldn't say I'm not a bit angry about IRMAA (too abrupt - $1 over) BUT you're right how much it's subsidized - but not just by gummint. Also by everyone who's not on it.

It would be great to eliminate the steps

 

[EarlyandLate]

As long as you don't add any new contributions, an IRA "rolled over" from a 401k plan enjoys the same federal protections as the 401k account.

Biggest advantage of leaving money in an old 401k is the ability to tap it under certain conditions starting at age 55 instead of 59 1/2.

Hmmmm, I have never heard of this loophole. Just another example of why ER.org is so great!

 

[Koolau]

I would quibble on one detail. These are equal-opportunity schemes to confiscate a portion of all kinds of savings, not just Roths.

Quite true, of course. My motto: "No New Taxes."



That phrase hasn't always w*rked out well for politicians, howerver.