RMDs are they really something to worry about?

[pb4uski]

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. ....

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

+1 I was skeptical but Bard thinks that is right (but Bard is not always right):

Yes, a 401(k) rolled over to an IRA enjoys the same protection from creditors regardless of whether or not any contributions are made to the IRA. This is because the creditor protection is based on the source of the funds in the IRA, not on the contributions made to the account.

Under the Employee Retirement Income Security Act (ERISA), 401(k) plans are protected from creditors. This means that creditors cannot seize the funds in a 401(k) plan, even if the account holder files for bankruptcy.

When a 401(k) plan is rolled over to an IRA, the funds in the IRA retain their ERISA protection. This is because the funds in the IRA are still considered to be part of the 401(k) plan, even though they are now held in an IRA.

The only way that creditors could seize the funds in an IRA that was rolled over from a 401(k) plan is if the account holder made non-qualified contributions to the IRA. Non-qualified contributions are contributions that are made with after-tax dollars and are not subject to ERISA protection.

If you are concerned about creditor protection, it is important to make sure that any contributions you make to your IRA are qualified contributions. You can do this by rolling over funds from a qualified retirement plan, such as a 401(k) plan, to your IRA. You can also make direct contributions to your IRA, but these contributions must be made with after-tax dollars.

 

[jazz4cash]

Again, IRA rules for moving funds are so complicated it may not be possible to enforce them, or maybe you just fall down a mineshaft you couldn’t see.

What happens when funds are moved from a 401k to an IRA and subsequently moved between IRAs?

I’ve transferred funds numerous times from my 401k to various IRAs. Only Fidelity labeled these as Rollover IRA. My understanding is the Rollover designation means the funds are eligible to be added to another employer’s 401k. Subsequent transfers from IRAs at the credit union went into the same Rollover IRA. Maybe they eligible because they originated as 401k money but no one has asked about that.

 

[RetMD21]

Interesting, Vanguard made a point of keeping my rollover (TSP) separate from other IRAs and I may have had to sign something to commingle

 

[Midpack]

Interesting, Vanguard made a point of keeping my rollover (TSP) separate from other IRAs and I may have had to sign something to commingle

DW and I both had TIRAs (contributions) and rollover IRAs (from multiple 401ks) for many years. In 2014 I asked my VG rep (good old days?) what was stopping me from combining from 4 IRAs to 2 IRAs - and he said ‘nothing as long as you don’t care about having the option to move back to a 401k.’ So now I have a TIRA and DW has her TIRA, no rollover IRAs. FWIW.

 

[Texas Proud]

Again, IRA rules for moving funds are so complicated it may not be possible to enforce them, or maybe you just fall down a mineshaft you couldn’t see.

What happens when funds are moved from a 401k to an IRA and subsequently moved between IRAs?

I’ve transferred funds numerous times from my 401k to various IRAs. Only Fidelity labeled these as Rollover IRA. My understanding is the Rollover designation means the funds are eligible to be added to another employer’s 401k. Subsequent transfers from IRAs at the credit union went into the same Rollover IRA. Maybe they eligible because they originated as 401k money but no one has asked about that.

Both Vanguard and Schwab has mine labeled as Rollover.. it is not just Fidelity...


And both Vanguard and Fidelity label the accounts that I inherited differently... with my mom's name on them...


If you move accounts (at least from what I see) the new broker requires the same account name as the old broker...

 

[RetMD21]

DW and I both had TIRAs (contributions) and rollover IRAs (from multiple 401ks) for many years. In 2014 I asked my VG rep (good old days?) what was stopping me from combining from 4 IRAs to 2 IRAs - and he said ‘nothing as long as you don’t care about having the option to move back to a 401k.’ So now I have a TIRA and DW has her TIRA, no rollover IRAs. FWIW.

Vanguard should have had ncbill do some training of the reps, lol.

 

[CRLLS]

From various articles I found on the 'net, Rollover IRAs are protected against bankruptcy up to $1.51 million. It may be higher now as I couldn't determine the date of the article. Nice to know. When I rolled over 401K's and pension plans, I seem to remember something to that affect being mentioned by Fido rep at that time. It has long been forgotten. Nice to have a refresher now and again.

 

[dknighd]

Funny. The last thing on my mind would be the things some others worry about.

 

[Car-Guy]

From various articles I found on the 'net, Rollover IRAs are protected against bankruptcy up to $1.51 million. It may be higher now as I couldn't determine the date of the article. Nice to know. When I rolled over 401K's and pension plans, I seem to remember something to that affect being mentioned by Fido rep at that time. It has long been forgotten. Nice to have a refresher now and again.

From Investopedia:


All types of individual retirement accounts, or IRAs, recognized under the federal tax code enjoy substantial protection from creditors during a bankruptcy. Protection for IRAs was signed into law by President George W. Bush under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005.


Protection under this law varies, depending on the type of IRA. Traditional IRAs and Roth IRAs are currently protected to a value of more than $1.5 million.2 SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in a bankruptcy, regardless of the dollar value.3

 

[ncbill]

Again, IRA rules for moving funds are so complicated it may not be possible to enforce them, or maybe you just fall down a mineshaft you couldn’t see.

What happens when funds are moved from a 401k to an IRA and subsequently moved between IRAs?

I’ve transferred funds numerous times from my 401k to various IRAs. Only Fidelity labeled these as Rollover IRA. My understanding is the Rollover designation means the funds are eligible to be added to another employer’s 401k. Subsequent transfers from IRAs at the credit union went into the same Rollover IRA. Maybe they eligible because they originated as 401k money but no one has asked about that.

And keep in mind state law protections are often more generous than federal.

Here under state law any type of IRA (including inherited) in any amount is protected.

 

[EarlyandLate]

Funny. The last thing on my mind would be the things some others worry about.

Bad things do happen to good people. My sister was stopped in a line of cars waiting for the car in front to make a left turn. She was somewhere in the middle. An idiot slammed into the back of the line at high speed. That person was basically indigent, so the driver in the front of the line sued the people in the middle for his supposed back and neck injuries. It actually went to court and the amount the injured party was seeking was well above the insurance my sister had and would have wiped her out financially. Fortunately, he was shown to be a fraud and lost. The whole ordeal did cause my poor sister a huge amount of stress.

 

[Sanstar]

We have enough in combined pensions to cover routine expenses and save a small amount each month. I’m thinking when RMD’s start for DH in a couple years, we’ll have taxes withheld by FIDO when it transfers to our post-tax savings. Then, use that money to pay taxes on Roth conversions. With his RMD at $50-$60K, we should be able to make a dent in tIRA’s and beef up our Roth’s. Eventually, tIRA’s will be depleted and any WD’s after that will be tax free. ?Rules don’t change anytime soon.

 

[CRLLS]

From Investopedia:


All types of individual retirement accounts, or IRAs, recognized under the federal tax code enjoy substantial protection from creditors during a bankruptcy. Protection for IRAs was signed into law by President George W. Bush under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005.


Protection under this law varies, depending on the type of IRA. Traditional IRAs and Roth IRAs are currently protected to a value of more than $1.5 million.2 SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in a bankruptcy, regardless of the dollar value.3

Good to know. Thanks for the clarification.

 

[Involuntary Retiree]

From Investopedia:


All types of individual retirement accounts, or IRAs, recognized under the federal tax code enjoy substantial protection from creditors during a bankruptcy. Protection for IRAs was signed into law by President George W. Bush under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005.


Protection under this law varies, depending on the type of IRA. Traditional IRAs and Roth IRAs are currently protected to a value of more than $1.5 million.2 SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in a bankruptcy, regardless of the dollar value.3

Well, it's a little more complicated than that. Yes, the Bankruptcy Code sets out federal bankruptcy exemptions, but generally exemptions applied in a bankruptcy case are a function of state law. My state (Oklahoma) has opted out of the federal bankruptcy exemptions, and every Oklahoma resident-debtor is required to apply Oklahoma state law exemptions in bankruptcy. Now, that's not a bad thing because Oklahoma exemptions are generally more generous than the federal exemptions, and, in the context of tax-favored retirement accounts, there is no limit as to amounts. Oklahoma's homestead exemption, in most situations, is also more generous that the federal exemptions.



So, my point is to know what the exemption laws are in your state of residency, and if a bankruptcy filing would ever be an issue, how those state exemptions are treated in bankruptcy. Lots of issues. Not an easy pronouncement of the applicable law.

 

[Texas Proud]

Well, it's a little more complicated than that. Yes, the Bankruptcy Code sets out federal bankruptcy exemptions, but generally exemptions applied in a bankruptcy case are a function of state law. My state (Oklahoma) has opted out of the federal bankruptcy exemptions, and every Oklahoma resident-debtor is required to apply Oklahoma state law exemptions in bankruptcy. Now, that's not a bad thing because Oklahoma exemptions are generally more generous than the federal exemptions, and, in the context of tax-favored retirement accounts, there is no limit as to amounts. Oklahoma's homestead exemption, in most situations, is also more generous that the federal exemptions.



So, my point is to know what the exemption laws are in your state of residency, and if a bankruptcy filing would ever be an issue, how those state exemptions are treated in bankruptcy. Lots of issues. Not an easy pronouncement of the applicable law.

I could be completely wrong on this but I think that bankruptcy is a federal event... IOW your have to file in a federal court... the federal exemptions are a minimum... I do believe that the states can add additional items but cannot take away any federal ones... reading a little it might be that you either take federal or state exemptions... so it is important to check your state...

 

[Rianne]

Bad things do happen to good people. My sister was stopped in a line of cars waiting for the car in front to make a left turn. She was somewhere in the middle. An idiot slammed into the back of the line at high speed. That person was basically indigent, so the driver in the front of the line sued the people in the middle for his supposed back and neck injuries. It actually went to court and the amount the injured party was seeking was well above the insurance my sister had and would have wiped her out financially. Fortunately, he was shown to be a fraud and lost. The whole ordeal did cause my poor sister a huge amount of stress.

Such a sad experience. I always think, about every day, it takes around one second to change your life forever. When my bike (in my twenties) hit a curb and my head hit a cement light post, that changed my life for months.

Falls happen before you even know it. Most accidents before you're aware of them. A deer steps out, twist your ankle, or a car hits you. Then the event plays over and over in your head. Your sister could do nothing to avoid that accident. I hope she's better now.

 

[Koolau]

Funny. The last thing on my mind would be the things some others worry about.

That's an interesting take. I have occasionally learned here to worry about things I didn't know I should worry about. No one can know everything and that includes the things that we should worry about. I was unconsciously incompetent (didn't know I didn't know.) Much better to know than not know in most cases. YMMV

 

[Car-Guy]

So I was asked this question the other day by a family member and I honestly didn't know the answer. The question was: if someone turns 73 in 2024 (let's say on "June 23rd"), can they make their first RMD withdrawal in January 2024 and it will "count" for their annual withdrawal or must they wait to make the withdrawal until after their birthday to be counted?

I wanted to say "sure, it's by tax/calendar year," but then realized I really didn't know for sure about the first year withdrawal. And yes, I told them about the special rule to delay the first years withdrawal until April of the next year but I didn't know about taking it early in the year you turn 73.

Inquiring minds want to know. Anyone know "for sure"?

 

[REWahoo]

^^^ This answer your question? From IRS.gov:

...Required Minimum Distributions (RMDs) are minimum amounts that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 72 (73 if you reach age 72 after Dec. 31, 2022).

 

[TheWizard]

So I was asked this question the other day by a family member and I honestly didn't know the answer. The question was: if someone turns 73 in 2024 (let's say on "June 23rd"), can they make their first RMD withdrawal in January 2024 and it will "count" for their annual withdrawal or must they wait to make the withdrawal until after their birthday to be counted?

I wanted to say "sure, it's by calendar year," but then realized I really didn't know for sure about the first year withdrawal. And yes, I told them about the special rule to delay the first years withdrawal until April of the next year but I didn't know about taking it early in the year you turn 73.

Inquiring minds want to know. Anyone know "for sure"?

It's a calendar year thing for RMDs, starting the year you turn the trigger age.
Otherwise it would be difficult for people born on New Year's Eve...

 

[Car-Guy]

Thanks "guys", (last two reply's) So they could take it Jan 1... That's what I thought, but I really didn't know for sure since who knows if there are special rules for that too! But it makes sense.

 

[JackJester]

I did my first Roth Conversion today. It was easy using Schwab's 'Move Money’ tool. I was not sure what to do so I called Schwab and they walked me through it. I do like their customer service. I killed 2 birds with 1 stone: 1) I moved $40K in my TIRA from SCHZ (intermediate Bond ETF) ... which as a bond fund has been a killer lately,...and moved it to the Roth. Conversion complete. Then 2) I sold the SCHZ and bought a 1 year CD at 5.40%. I did all of this in about 15 minutes. Easy Peasy. I should still fit in the 12% bracket with this conversion.

The bigger challenge has been building a spreadsheet to determine how much Roth conversions to do. It’s hard to guesstimate what my TIRA balance will be in the year 2042 (at age 75); but I can assume a very worst case based on my SWR retirement spreadsheet using 4% SWR and assuming no growth over my withdrawl time (again an extremely worse case). So, at age 75 I might have $1mil left in the TIRA. I assumed RMDs of 27.4% (which is age 72 RMD #s…not sure if those will be the same when I am a yr 75 RMD i.e., born after 1960). So, for now I’m assuming the RMD is $274K. Adding SS taxed at 85% we will be at $335K of Ordinary Income. So I spread that out across the tax brackets and I end up increasing into the 24% bracket vs being in the 12% right now. It appears I’m $209K over the 12% bracket limit. Thus, I’m not sure, but I guess I need to convert at least $209K to get my self back to 12% when RMDs kick in Am I thinking this right? Thx

 

[SecondCor521]

The bigger challenge has been building a spreadsheet to determine how much Roth conversions to do. It’s hard to guesstimate what my TIRA balance will be in the year 2042 (at age 75); but I can assume a very worst case based on my SWR retirement spreadsheet using 4% SWR and assuming no growth over my withdrawl time (again an extremely worse case). So, at age 75 I might have $1mil left in the TIRA. I assumed RMDs of 27.4% (which is age 72 RMD #s…not sure if those will be the same when I am a yr 75 RMD i.e., born after 1960). So, for now I’m assuming the RMD is $274K. Adding SS taxed at 85% we will be at $335K of Ordinary Income. So I spread that out across the tax brackets and I end up increasing into the 24% bracket vs being in the 12% right now. It appears I’m $209K over the 12% bracket limit. Thus, I’m not sure, but I guess I need to convert at least $209K to get my self back to 12% when RMDs kick in Am I thinking this right? Thx

It's hard to make any sort of good estimate 19 years in the future.

A couple of comments:

1. Your age 75 RMD will be based on the age 75 divisor in 2042, not the age 72 divisor. Currently the age 75 divisor is 24.6.

2. You're making a huge mistake in the way you calculate the RMD. You divide the IRA balance by the divisor; you do not multiply. So assuming $1M in your IRA at age 75, your RMD would be $1M / 24.6 = $40,650.

3. The tax brackets increase by inflation each year. So the top of the 12% bracket today for a single is $44,725. 19 years from now at 3% inflation it will be $44,725 * (1.03 ^ 19) = $78,425.

4. Your SS benefits are generally quoted in today's dollars but will be COLA adjusted between then also. The average COLA is about 3%, so you could do math similar to #3 above. The amount at which 85% of SS becomes taxable is not inflation or COLA adjusted, though, and will stay at $34K unless Congress changes the law.

 

[JackJester]

Thank you for these corrections. I will recalculate. Item # 2 should change things dramatically.

 

[PERSonalTime]

I'm kinda agreeing with that (I think). I'm retired now & since my RMDS are substantial, I've sometimes regretted not doing Roth conversions based on what I read here. But looking at the numbers, my tax rate is now around 24-25%, which is similar to the rate when I was working, so maybe there was never a time when Roth conversions would have been wise. (Too late now, anyway.)

I remember that when IRAs came along, the collective wisdom was that it was a good idea to defer income because your tax rate would be lower when you retired. For me, that didn't happen and maybe I just broke even, but in any case, deferring income seemed a good way for me to save.

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