RMDs are they really something to worry about?

[Texas Proud]

It is a tax bomb when one spouse dies....


My oldest sister makes too much money for the low cost medicare being single.... and her tax bill went way up from what it was when married... with less income...

 

[Dtail]

Have a different but related issue for my mom.
My siblings want me to take more monies out of my mom's IRA, so they won't have to pay more taxes upon inheritance. However, she is a widow now and all the IRMAA rates come into play, not to mention higher rates.
I could calculate it all out, if they provide me their tax brackets, etc, but don't wish to spend the time. lol

 

[jollystomper]

In thinking more about this, for us the best tax planning for future RMDs would be to move to a state that does not tax RMDs (via either no income tax or specifically not taxing retirement distributions). But of course that brings into considerations many other factors .

 

[thatguy]

All this stuff was out of sight, out of mind when I retired at 57. I didn't think much about it til my first RMD at age 70. So than I started doing Roth conversions to use up the 12% bracket, on the other side of the tax torpedo. A few years of that and I realized the conversion amount was a pitifully small percent of the pretax total. So last year I converted into the 22% bracket, up to near the 1st IRMAA threshold.
It seems clear that there were missed opportunities to convert earlier at 15% of 12%. It's less clear where the money to pay the tax would have come from. There was not lot of extra cash early in.

 

[ncbill]

I view Roth conversions as a hedge against future tax bracket increases, one member of a couple dying, federally tax-free for heirs, etc.

Since I knew I was going to inherit it I still regret not converting mom's IRA to Roth ~20 years ago when it was a fraction of the balance it is today.

I would have paid any taxes, of course, but given her medical expenses back then there might not have been any taxes due.

So today I Roth convert my IRA balance up to the top of the 12% (MFJ) bracket.

 

[Texas Proud]

Have a different but related issue for my mom.
My siblings want me to take more monies out of my mom's IRA, so they won't have to pay more taxes upon inheritance. However, she is a widow now and all the IRMAA rates come into play, not to mention higher rates.
I could calculate it all out, if they provide me their tax brackets, etc, but don't wish to spend the time. lol

I handled my mom's money and I did nothing that was not best for my mom...


Never did give a hoot about the kids (including me)...


Now, after she passed my brother asked for a delay in IRA transfers which I did... nobody needed the money and all agreed....

 

[Route246]

I had a talk with a FI friend who is 3 years older than me (I'm 66). We've paid high taxes for more than 40 years living in California. That is the way it is here. He told me to get used to it because RMDs (from about $3M deferred accounts) and max SS will lock us in to high taxes until we expire. It is a wonderful problem to have, one that many would gladly trade places for.

I'm deferring SS now and we actually have more than enough in non-tax-deferred assets to live off of so those RMDs are effectively going back into savings less the taxes.

We are now devising plans to distribute "sweat money" to charities of our liking (currently my university and a few special charities we like and have seen their financial statements) which can offset some of those taxes, we'll have to see how our portfolio looks about when I turn 70, everything is flexible and elective at this point.

 

[DrRoy]

I am doing some Roth conversion along the way, but it won't change things a lot.

 

[Dtail]

I handled my mom's money and I did nothing that was not best for my mom...


Never did give a hoot about the kids (including me)...


Now, after she passed my brother asked for a delay in IRA transfers which I did... nobody needed the money and all agreed....

How does that work with getting a delay in the IRA transfers?

 

[wearefinishedworking]

I am wondering that too, maybe just stalling to finalize the estate?

 

[Texas Proud]

How does that work with getting a delay in the IRA transfers?

Hmmm, not quite sure.... might not have done it correctly....


Mom died in 2019... took her RMD after she died and put it in her last 1040... Fidelity recommended this and sent the 1099 for it...



Did nothing for 2020.... OH... remembered that RMD was not required that year so I did it correctly...


Transferred the funds in early 2021...

 

[Dtail]

Hmmm, not quite sure.... might not have done it correctly....


Mom died in 2019... took her RMD after she died and put it in her last 1040... Fidelity recommended this and sent the 1099 for it...



Did nothing for 2020.... OH... remembered that RMD was not required that year so I did it correctly...


Transferred the funds in early 2021...

Okay so a one shot combination of different events specific to a certain timeframe.

 

[cathy63]

Hmmm, not quite sure.... might not have done it correctly....


Mom died in 2019... took her RMD after she died and put it in her last 1040... Fidelity recommended this and sent the 1099 for it...

Hopefully you're misremembering this part, because that is definitely not allowed and the financial advisor who suggested it is likely to find himself in some very hot water if it's discovered! If the account had no named beneficiary (and there was no living spouse), the distribution should have been reported under the estate's EIN and taxed on the estate's 1041.

 

[RetMD21]

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.

I think I'm not alone in being a high income retiree wishing I was paying the low income retiree taxes.

Smoothing income makes sense. Before I came here I might have been inclined to do the old fashioned conventional spending sequence, taxable followed by tax deferred followed by tax free. Although this may give an early retiree some very low tax years it comes at the cost of higher taxes later.

 

[Texas Proud]

Hopefully you're misremembering this part, because that is definitely not allowed and the financial advisor who suggested it is likely to find himself in some very hot water if it's discovered! If the account had no named beneficiary (and there was no living spouse), the distribution should have been reported under the estate's EIN and taxed on the estate's 1041.

Nope, it was put on the 1040... there were beneficiaries.


The money was moved from the IRA to the taxable account and was distributed over a year later...


One of the problems I had was getting the lawyer to get me as the executor... I did not get appointed until Jan or Feb of the next year...


Fidelity did the transfer after I asked what we needed to do...

 

[Koolau]

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.

Yeah I agree about the good problem to have. I thought I'd done quite a bit to reduce my RMDs and recently along come a big rise in Megacorp stock (I'd gotten "rid" of a lot of it.) So, suddenly that balance is a couple of hundred $K higher than I'd gotten it down to in the past. Oh, well. The gummint giveth and the gummint taketh away. Blessed is the man who has such a problem. YMMV

 

[Texas Proud]

Yeah I agree about the good problem to have. I thought I'd done quite a bit to reduce my RMDs and recently along come a big rise in Megacorp stock (I'd gotten "rid" of a lot of it.) So, suddenly that balance is a couple of hundred $K higher than I'd gotten it down to in the past. Oh, well. The gummint giveth and the gummint taketh away. Blessed is the man who has such a problem. YMMV

I did a NUA on my company stock... will get hit with a big tax bill this year but moved a bunch of money out of my 401(k) with little tax hit... and cap gains going forward..


https://www.fidelity.com/learning-center/personal-finance/retirement/company-stock

 

[Koolau]

I did a NUA on my company stock... will get hit with a big tax bill this year but moved a bunch of money out of my 401(k) with little tax hit... and cap gains going forward..


https://www.fidelity.com/learning-center/personal-finance/retirement/company-stock

Yeah, I screwed that up long ago by taking some of my stock from the 401(k). IOW a different year for distribution.

 

[Texas Proud]

Yeah, I screwed that up long ago by taking some of my stock from the 401(k). IOW a different year for distribution.

Yep, that will do it... you have to plan this way in advance.

 

[SecondCor521]

Based on the retirement planning software I'm using, RMD will be a problem for me as well. However, I have 17 years before I turn 75. I definitely want to have a plan to address RMDs when I turn 60 in 3 years. The goal is to do roth conversions starting at age 60 as majority of my retirement investment in tax deferred accounts (401k).

Why wait? You can do Roth conversions before age 60 with no additional tax penalties, just the ordinary income taxes that would be due anyways.

Next few years might be a good opportunity with low-ish brackets, or at least many think so. It could be a pity for you to miss out on those.

 

[audreyh1]

We are not overly worried about RMDs. We do not have that much in IRAs. $600k each respectively. DW is just 65 so 7 years to go for her at the current law, and I am 70 so 2 years for me. $600k x 4% is a mere $24k. I guess if we had $4m in deferred accounts it may be different. We do not take any withdrawals currently and at the current interest rates will not need to for the forseeable future.

Currently our IRA balances are ~20% of retirement assets. They used to be less (13%), but we’ve been spending down our taxable assets all these years. They grew quite a bit during that time too. We’ve shifting to primarily fixed income of our AA on our IRAs to limit future growth.

Due to our short contribution periods our SS income won’t be that high and no pensions either.

Anyway due to the smaller percentage overall we haven’t been that concerned. Also we plan to have heirs inherit a substantial portion when one spouse passes, and IRA funds are available to tap for QCDs, and long-term-care/medical expenses.

I’ve focused on improving the tax efficiency of our taxable accounts in terms of annual distributions. When one spouse passes what remains will get a stepped up basis on capital gains and they will have an opportunity to improve things even further.

 

[audreyh1]

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

DAF contributions don’t get the same favorable tax treatment as QCDs.

Of course you still get the ability to itemize, it’s just that QCDs don’t even appear as income.

 

[Koolau]

DAF contributions don’t get the same favorable tax treatment as QCDs.

Of course you still get the ability to itemize, it’s just that QCDs don’t even appear as income.

Nice for keeping that MAGI low!

 

[dknighd]

To answer the original question:
"RMDs are they really something to worry about?"

My answer is NO.

I'm not worried, I'm pretty sure that money will be taxed one day. But I do think about RMD. I wish they did not exist, but I understand the reason. The government was "kind" enough to defer taxes for many years. They need the taxes that were deferred. Hence the need for RMD. I do not think that increasing the age of RMD and decreasing the time to withdraw from inherited tax deferred accounts was an accident. They can't defer taxes for ever!



I think this was a clever way for the Government to invest in stocks, without doing it directly. Think about it, if our investments do well, then the Government gets to share in our good fortune.


We live comfortably in our current tax bracket. So I Roth convert up to the top of bracket. As long as we can live comfortably I'll be happy.


My 87 year old widower father does not like RMD. I remind him that as long as the RMD is more than he needs, he's fine.



Taxes are an expense. My best guess is I came out ahead by having them deferred. But who knows?

 

[dknighd]

The ideal is to smooth out tax brackets. And not to run out of money.


I would suggest that if RMD bump you up in taxes paid, that is OK.
It is better than the alternative, which is:
The RMD, and other incomes, not matching your needs.


It is a puzzle.