Traditional IRAs and RMD advice

[freddyw]

I have the majority of my retirement portfolio in Traditional IRA's (85%) and the remainder in a Roth IRA (15%). I've been retired since '08 and it has been funded entirely using the IRA's. I'm starting SS beginning this year and this will considerably reduce the amount of money needed from the IRA's. When it's time to take RMD's on the Traditional IRAs, if everything goes as planned, I will have to withdraw significantly more RMD dollars than I need to fund expenses for the year. It's a nice problem to have but I was wondering what others in a similar position have done with the excess money. Is it possible to take the excess IRA distributions, that have taxes taken out, and contribute to the Roth IRA? That would be my preference. Otherwise I guess I'll have to put the excess money in non-IRA accounts which will incur annual taxes on interest & dividends along with any cap gains. Any ideas as to what's possible to reduce tax consequences? Thanks in advance with your suggestions.

 

[SecondCor521]

You may contribute to a Roth IRA only if you have earned income and only up to the annual limit ($6K for youngsters, $7K for people of a certain age, adjusted annually for inflation).

You may not convert traditional IRA RMDs to your Roth IRA.

You may do additional Roth conversions after you have taken your RMD.

Whatever you withdraw from your traditional IRA will count as ordinary income.

You can give away some of your IRA via QCDs, which can start as early as 70.5, have to happen logically (and perhaps chronologically) after your RMD is met for the year. QCDs are limited to $100K per taxpayer per year.

What you might look into is doing Roth conversions now before you hit RMD age. That will reduce the size of your RMDs and help with the tax bite.

If you don't want to spend all of your RMD when you get there, the most common thing is to stick it in taxable. Some give it to kids/grandkids/charity.

 

[Hermit]

At least it will be all yours. You won't again have to share a large portion with your Uncle once you have settled up at RMD time. You will have to pay taxes on the interest and dividends as well as capital gains depending on your income. I am not clear on Roth once you have started RMDs. Maybe someone will chime in that can shed some light.

 

[audreyh1]

So how many years before you have to take RMDs?

Many folks are doing Roth conversions from their traditional IRAs in the years before RMDs.

 

[Souschef]

I am in a similar position to you. I retired in early '09, and have a large amount of money in IRA's. We are blessed that our SS and pensions cover almost all our needs.
This year our RMD will be about $110K. Here is what we will do:
$60 K to our 4 sons (15K each)
$34 K for Federal and State taxes
The balance (or more)will be QCD's to various local charities

 

[freddyw]

I have 6 years until I'm 72 however I have no earned income so I don't think I can do any conversions to a Roth IRA.

 

[RunningBum]

I have 6 years until I'm 72 however I have no earned income so I don't think I can do any conversions to a Roth IRA.

Sure you can. You just can't make contributions.

 

[RobbieB]

I'm doing RMD's before I have to. The balance keeps increasing. Yeah, good problem to have -

 

[freddyw]

Thanks for your reply. That's pretty much what I had thought was my option regarding a Roth conversion but wasn't totally sure. Looks like any extra RMD money will have to go into some form of non-IRA investment or gifted. Again thanks.

 

[Retire_2031]

I am relatively new to this forum, so, I may be wrong....but, I thought that prior to 72 (even if you don't have any income) you can still do Roth conversions.....you can't do Roth contributions.

Can someone more knowledgeable that I, please provide some perspective?

Update....looks like someone just confirmed the above a few minutes ago.

SS

 

[RetiredAndLovingIt]

I have 6 years until I'm 72 however I have no earned income so I don't think I can do any conversions to a Roth IRA.

Yes you can do always do conversions (and pay the tax)
You can't do contributions unless you have earned income.

 

[audreyh1]

I have 6 years until I'm 72 however I have no earned income so I don't think I can do any conversions to a Roth IRA.

That’s the whole point - you can still do Roth conversions.

 

[audreyh1]

I am relatively new to this forum, so, I may be wrong....but, I thought that prior to 72 (even if you don't have any income) you can still do Roth conversions.....you can't do Roth contributions.

Can someone more knowledgeable that I, please provide some perspective?

Update....looks like someone just confirmed the above a few minutes ago.

SS

That’s correct. And once you reach RMD age, you can still do conversions after you take out your RMD. So you have to take out more than your RMD to do any Roth conversion, but it’s still an option.

Most people try to do the bulk of their conversions before they reach RMD age.

 

[skyking1]

It sounds to me like you should be doing conversions, OP.

 

[harley]

I'm doing RMD's before I have to. The balance keeps increasing. Yeah, good problem to have -

I think that's called a D.

 

[Dtail]

We are doing some distributions and some Roth conversions before RMD time.
Still have 81% in tIRA, so will have RMD at 72. First world problem.

 

[ncbill]

Yes you can do always do conversions (and pay the tax)
You can't do contributions unless you have earned income.

Spouse's earned income also allows for IRA contributions.

 

[aja8888]

I think that's called a D.

Yeah, it a D without the RM part!

 

[OldShooter]

One thing you can do is to change all of your charitable contributions to be QCDs. This will almost zero out your charitable deductions on the 1040. In our case our remaining deductions (state and local taxes, mostly) were maybe half of the standard deduction, so of course we took the standard. It kind of seems like we're getting kind of double deductions for the charitables.

Schwab gives us QCD check blanks that charge the IRA, so it's really no different than writing any other check. We even use QCDs for little stuff like the public radio dues. You just have to keep careful track of what the QCD checks were spent on and match the checks up with your deduction letters as they come.

There's still the $300 freebie donation deduction; we miss enough stuff with the QCDs that it's easy to find $300.

 

[Gotadimple]

Freddy,
The order to use with RMDs is:
1. Qualified Charitable Distribution - these are considered a part of your RMD but you don't pay taxes on this amount,
2. Required Minimum Distribution - from the minimum calculated for you by your broker (less any QCD) to more than the minimum,
3. Conversions of IRA amounts to a Roth IRA.

#2 and #3 are considered taxable income and you do want to watch how that affects your total Adjusted Gross Income as you could push your income above the limit and IRMAA (a premium for high income) will apply to the cost of your Medicare Part B and Part D premiums.

 

[Sunset]

One thing you can do is to change all of your charitable contributions to be QCDs. This will almost zero out your charitable deductions on the 1040. In our case our remaining deductions (state and local taxes, mostly) were maybe half of the standard deduction, so of course we took the standard. It kind of seems like we're getting kind of double deductions for the charitables.

Schwab gives us QCD check blanks that charge the IRA, so it's really no different than writing any other check. We even use QCDs for little stuff like the public radio dues. You just have to keep careful track of what the QCD checks were spent on and match the checks up with your deduction letters as they come.

There's still the $300 freebie donation deduction; we miss enough stuff with the QCDs that it's easy to find $300.

Thanks for the detailed view of how it works, it seems less complicated and abstract than I have been thinking.

 

[OldShooter]

Thanks for the detailed view of how it works, it seems less complicated and abstract than I have been thinking.

Yes. The key is those check blanks from Schwab. It saves us (and them) from a lot of administrivia. As competitive as things are, I'd be surprised if Fido, and maybe even VG, offer check blanks as well.

 

[audreyh1]

Yes. The key is those check blanks from Schwab. It saves us (and them) from a lot of administrivia. As competitive as things are, I'd be surprised if Fido, and maybe even VG, offer check blanks as well.

You can get checks for your Fidelity IRAs AFAIK.

 

[gauss]

Regarding checkbooks that you write from to fund QCDs, recall that you may run into issues if the charity does not actually cash the check until the next calendar year.

-gauss

 

[OldShooter]

Regarding checkbooks that you write from to fund QCDs, recall that you may run into issues if the charity does not actually cash the check until the next calendar year.

-gauss

True enough though we have never cut things so fine that this would be an issue. Usually, DW starts holding charity donations beginning November or earlier if we have hit our RMD for the year. She then sends them in January.

Also, if the charity's donation letter is dated the date of receipt of the check, there is no way that the IRS will audit to find the date of deposit. If we ever got a donation letter dated in the wrong year I would just request another letter carrying the receipt date and correct year.