RMDs are they really something to worry about?

[latexman]

....seems traditional 401K may be good way to go and RMDS aren't that big of a deal. Your thoughts appreciated.

Relative to life and death decisions, RMDs aren't a big deal.

RMDs mean one has a nest egg of some size, which is a very good thing. If one's situation is such they can save on taxes by doing Roth conversions, well, that makes a very good thing better. If one's situation is such they can't save on taxes, or it's so little to not be worth the effort, then, eh, RMDs are still a very good thing.

 

[LateToFIRE]

This has been an interesting discussion/debate. I'm using Retiree Portfolio Model (boogleheads) and its showing me very little benefit to Roth conversions (in my case). RMD's will be substantial as tIRA/401k accounts are currently ~$2M, projected to exceed $3M if I do nothing before RMD's kick in (no conversions, no WD's). Still, the limited conversions I could do will not make much difference. Not the worst problem one could have.

EDIT: In fact, the model is showing me a net negative impact. In other words, Roth conversions actually hurt my ending asset balance. Hmmm, will have to investigate why that is the case. I'm sure it has to do with assumptions around future tax rates.

EDIT #2: I should note that my projected Fed marginal tax rate is in the 22% band in most retirement years.

EDIT #3: I'm sure someone will point out that I might still want to do conversions as an estate planning consideration, and also in the event one of DW or I predecease the other sooner rather than later, launching the survivor into a much higher tax bracket. Those would be fair points!

 

[Exchme]

This has been an interesting discussion/debate. I'm using Retiree Portfolio Model (boogleheads) and its showing me very little benefit to Roth conversions (in my case). RMD's will be substantial as tIRA/401k accounts are currently ~$2M, projected to exceed $3M if I do nothing before RMD's kick in (no conversions, no WD's). Still, the limited conversions I could do will not make much difference. Not the worst problem one could have.

EDIT: In fact, the model is showing me a net negative impact. In other words, Roth conversions actually hurt my ending asset balance. Hmmm, will have to investigate why that is the case. I'm sure it has to do with assumptions around future tax rates.

If you are married, then a key value of Roth Conversions is to avoid the surviving spouse being in a single bracket someday.

If you are single and will have $3M in your IRA when RMDs kick in, then some of the advantage of Roth Conversions is lost because your marginal tax rate will always be high.

However, unless you are doing such large Roth Conversions early that your marginal tax rate is going down later in life, Roth Conversions should still be a winner for you, especially if you can pay the taxes on them out of taxable. Reducing the taxable balance is a key aspect of Roth Conversions as the benefit of reducing tax drag rises faster than exponentially.

My guess is that you are mistakenly valuing the residual in the IRA as equal to the residual in Roth. That is not purchasing power parity. Unless the money is used for Long Term Care or will be given to a charity, the IRA will have taxes when withdrawn, either by you or your heirs. So roughly speaking, you should apply your marginal tax rate or that of your heirs to the residual IRA balance before making the comparison. The Bogleheads RPM spreadsheet does not do that for you, you have to make that adjustment yourself.

 

[Time2]

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.

I was once in a 5 car pile up at a stoplight. I was a bit stunned, my seat gave up and slide all the way back, an electric razor I had an a shelf in the car fell to the floor and turned on. So, I'm stunned trying to get my wits about me, wondering what the noise was, the young lady in the car I hit got out, gave me a dirty look and drove off. I don't thing she realized there were 3 more cars behind us involved. I'll never know if the mailman in the line was really injured or just wanted to milk the system for all he could.

 

[Time2]

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.

So, If you take it Jan 1st and the market gains 20% you did good, If it falls 20% you should have waited? RMD based on account size, "when"?

 

[LateToFIRE]

If you are married, then a key value of Roth Conversions is to avoid the surviving spouse being in a single bracket someday.

If you are single and will have $3M in your IRA when RMDs kick in, then some of the advantage of Roth Conversions is lost because your marginal tax rate will always be high.

However, unless you are doing such large Roth Conversions early that your marginal tax rate is going down later in life, Roth Conversions should still be a winner for you, especially if you can pay the taxes on them out of taxable. Reducing the taxable balance is a key aspect of Roth Conversions as the benefit of reducing tax drag rises faster than exponentially.

My guess is that you are mistakenly valuing the residual in the IRA as equal to the residual in Roth. That is not purchasing power parity. Unless the money is used for Long Term Care or will be given to a charity, the IRA will have taxes when withdrawn, either by you or your heirs. So roughly speaking, you should apply your marginal tax rate or that of your heirs to the residual IRA balance before making the comparison. The Bogleheads RPM spreadsheet does not do that for you, you have to make that adjustment yourself.

Great feedback!

Yes, I am married to your point on surviving spouse tax bracket.

And no, I had not yet made that leap of logic that I was comparing apples to oranges in comparing tIRA/401k balance to Roth balance. Brilliant point.

But, the point about "reducing the taxable balance... as the benefit of reducing tax drag rises faster than exponentially" I'm not yet understanding. FWIW, my taxable account (along with pension/SS) should be sufficient to meet my retirement needs (i.e. do not anticipate needing to WD tIRA/401k dollars until forced to do so by RMD).

 

[LateToFIRE]

...My guess is that you are mistakenly valuing the residual in the IRA as equal to the residual in Roth. That is not purchasing power parity. Unless the money is used for Long Term Care or will be given to a charity, the IRA will have taxes when withdrawn, either by you or your heirs. So roughly speaking, you should apply your marginal tax rate or that of your heirs to the residual IRA balance before making the comparison. The Bogleheads RPM spreadsheet does not do that for you, you have to make that adjustment yourself.

FYI, I do see that RPM shows a tax-adjusted total balance in the AA Summary tab in the far right column (easy to miss), but they are using average tax rates, not marginal as you suggested. Thx

P.S. Man, that model is a BEAST, but its forcing me to learn a lot of stuff I want to understand about retirement planning!

 

[pjigar]

But, the point about "reducing the taxable balance... as the benefit of reducing tax drag rises faster than exponentially" I'm not yet understanding. FWIW, my taxable account (along with pension/SS) should be sufficient to meet my retirement needs (i.e. do not anticipate needing to WD tIRA/401k dollars until forced to do so by RMD).

I think poster may have meant that if you pay the tax on Roth conversion with after-tax dollars then you are effectively moving the after-tax dollars to Roth bucket thereby avoid in any future taxes on the future gain of the after-tax money used to pay tax.

 

[LateToFIRE]

I think poster may have meant that if you pay the tax on Roth conversion with after-tax dollars then you are effectively moving the after-tax dollars to Roth bucket thereby avoid in any future taxes on the future gain of the after-tax money used to pay tax.

Um, yeh, think I'm starting to catch on, I need to think about the effect over a long period of time. When I run Roth conversions, the model shows me being able to convert "only" about $300K in the first few years, but that Roth Conversion account grows to ~$1M in 25-30 years and all those gains/dividends would be tax-free to me, DW, or heirs.

 

[pjigar]

Compounding is "real" magic.

 

[jimbee]

So, If you take it Jan 1st and the market gains 20% you did good, If it falls 20% you should have waited? RMD based on account size, "when"?

Typically, your RMD is based on account balance on December 31 the year before the RMD is due.
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

 

[Texas Proud]

One of the things that I would add to think about is if some of these exercises are really going to save you enough money...


I am not trying to minimize my taxes to the last dollar... close enough is good enough for me...



Think about it... your investments can go up and down ten, twenty and maybe even thirty thousand in a single day... it is the market... trying to wring out a few thousand in tax savings just does not move the needle for me..


Not that I do not do things that will save me taxes, but I want a good amount to do so... this year I moved my company stock into a taxable account and will pay a big tax bill but will probably save $50 to $60K in taxes in the future...



As they say, the juice has to be worth the squeeze...

 

[latexman]

Compounding is "real" magic.

Compound interest is the 8th wonder of the world.

 

[LateToFIRE]

Compounding is "real" magic.

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.

 

[TheWizard]

This has been an interesting discussion/debate. I'm using Retiree Portfolio Model (boogleheads) and its showing me very little benefit to Roth conversions (in my case). RMD's will be substantial as tIRA/401k accounts are currently ~$2M, projected to exceed $3M if I do nothing before RMD's kick in (no conversions, no WD's)...

Well, since tIRA and 401(k) accounts are basically DEFERRED COMPENSATION, you should be withdrawing from those accounts starting the year you retire, either for living expenses or Roth conversions.

Otherwise, you're setting up for the dreaded Tax Torpedo.

Once you get money into a Roth or taxable account you're in good shape wealth-wise, since withdrawals from a Roth are never taxed and money in a taxable account gets stepped up basis...

 

[TheWizard]

So, If you take it Jan 1st and the market gains 20% you did good, If it falls 20% you should have waited? RMD based on account size, "when"?

You're a bit confused.
I'm one of those who takes my RMD monthly, 1/12 of the yearly amount.
And I put maybe double my RMD into my taxable account each month. So that money is never out of the market for long...

 

[TheWizard]

Compound interest is the 8th wonder of the world.
View attachment 47074

Well, ok.
But compound INFLATION is the ninth wonder of the world...

 

[braumeister]

I've been doing conversions for a long time, and paid some fairly high taxes as a result. But I was able to take advantage of a cool one-time break: If you made a conversion in 2010, you were able to pay the taxes on it spread over two years, 2011 and 2012, which was a big help. Alas, that good deal hasn't been repeated.

But having endured the pain, I've finally reached the point where I won't have to do any more conversions. My RMD amounts can easily be satisfied with QCDs to charities I would support anyway.

 

[SecondCor521]

But I was able to take advantage of a cool one-time break: If you made a conversion in 2010, you were able to pay the taxes on it spread over two years, 2011 and 2012, which was a big help. Alas, that good deal hasn't been repeated.

As part of the CARES Act of March 2020, people impacted by the coronavirus (according to the definition in the law) could make retirement distributions up to $100K and spread the taxes due over three years. There was even an option to repay it into a retirement account and undo the taxes owed.

See the fourth bullet item at https://www.irs.gov/newsroom/coronavirus-relief-for-retirement-plans-and-iras or the second bullet item at https://en.wikipedia.org/wiki/CARES_Act#Retirement_plans_and_retirement_accounts.

 

[Koolau]

This has been an interesting discussion/debate. I'm using Retiree Portfolio Model (boogleheads) and its showing me very little benefit to Roth conversions (in my case). RMD's will be substantial as tIRA/401k accounts are currently ~$2M, projected to exceed $3M if I do nothing before RMD's kick in (no conversions, no WD's). Still, the limited conversions I could do will not make much difference. Not the worst problem one could have.

EDIT: In fact, the model is showing me a net negative impact. In other words, Roth conversions actually hurt my ending asset balance. Hmmm, will have to investigate why that is the case. I'm sure it has to do with assumptions around future tax rates.

EDIT #2: I should note that my projected Fed marginal tax rate is in the 22% band in most retirement years.

EDIT #3: I'm sure someone will point out that I might still want to do conversions as an estate planning consideration, and also in the event one of DW or I predecease the other sooner rather than later, launching the survivor into a much higher tax bracket. Those would be fair points!

At least it sounds like you are on top of the situation. It almost seems like "there is no good way around RMDs!"

But most of us here keep trying.

Death and taxes, baby. Death and taxes. The only two assured things in this world.

 

[jldavid47]

It almost seems like "there is no good way around RMDs!"

That's a feature, not a bug.

Retirement accounts (Traditional IRA, 401k, etc.) have always been called "tax deferred" for a reason. Uncle Sam is just getting back what you didn't pay in tax for all those years. RMDs are the price we pay for being able to deduct contributions from regular income and not pay capital gains taxes for all those years.

The alternative now is to contribute to Roth IRAs instead or simply invest in taxable accounts and "pay as you go." However, it wouldn't surprise me in the future if some "excess" accumulation excise tax "feature" might be added to Roth IRAs in the future (i.e. if the account gets over $X million in a given year the guvmint will tax Y% of it).

 

[Exchme]

One of the things that I would add to think about is if some of these exercises are really going to save you enough money...


I am not trying to minimize my taxes to the last dollar... close enough is good enough for me...



Think about it... your investments can go up and down ten, twenty and maybe even thirty thousand in a single day... it is the market... trying to wring out a few thousand in tax savings just does not move the needle for me..


Not that I do not do things that will save me taxes, but I want a good amount to do so... this year I moved my company stock into a taxable account and will pay a big tax bill but will probably save $50 to $60K in taxes in the future...



As they say, the juice has to be worth the squeeze...

Market variations hit all your accounts, minimizing taxes is on top of that, sort of the same as if you earned money. My Roth plan is projected to save hundreds of thousands, that would have taken me years of extra work to save that much. To me, that seems worthwhile to invest some hours in making a model.

The value of Roth Conversions depends on your tax bracket. If you will never be out of the 12% bracket, there won't be much value. But if you can shift income across one of the big "jumps" in tax rate, say from 22% to 12% or 32% to 24%, that is significant.

 

[LateToFIRE]

Well, since tIRA and 401(k) accounts are basically DEFERRED COMPENSATION, you should be withdrawing from those accounts starting the year you retire, either for living expenses or Roth conversions.

Otherwise, you're setting up for the dreaded Tax Torpedo.

Once you get money into a Roth or taxable account you're in good shape wealth-wise, since withdrawals from a Roth are never taxed and money in a taxable account gets stepped up basis...

As I think you surmised, my pension & SS will not cover my spending. My taxable portfolio should be sufficient to fund this gap.

I totally get that reducing the tIRA/401K is a good idea. Where I get kinda tripped up is this conundrum between: WD from tIRA/401K accounts for living expenses vs WD from iRA/401K for Roth conversions.

Sorry if I'm being dense.

P.S. I guess the idea is that the Roth is the only vehicle that offers TAX-FREE GRWTH and over an extended period the taxes saved on those funds probably outweighs the early tax hit of conversions.

 

[pb4uski]

... However, it wouldn't surprise me in the future if some "excess" accumulation excise tax "feature" might be added to Roth IRAs in the future (i.e. if the account gets over $X million in a given year the guvmint will tax Y% of it).

+1 I don't think that they would necessarily tax excess withdrawals. More likley that they would require any excess over $x million to be withdrawn within a certain period to limit the amount that can generate tax-free returns.

 

[Exchme]

As I think you surmised, my pension & SS will not cover my spending. My taxable portfolio should be sufficient to fund this gap.

I totally get that reducing the tIRA/401K is a good idea. Where I get kinda tripped up is this conundrum between: WD from tIRA/401K accounts for living expenses vs WD from iRA/401K for Roth conversions.

Sorry if I'm being dense.

P.S. I guess the idea is that the Roth is the only vehicle that offers TAX-FREE GRWTH and over an extended period the taxes saved on those funds probably outweighs the early tax hit of conversions.

Roth Conversions allow you to reduce your taxable account and shelter the growth for your lifespans + 10 years. Cutting that annual tax drag becomes a big deal over time. As you model more cases, you will find that the models consistently want you to shelter as many $ as possible, for as long as possible, in tax preferenced accounts.