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Follower ○○○

not needing RMD--what to do

My wife and I are recently retired at the age of 65. We both receive SS benefits and on top of it I receive a small pension from my former employer. No mortgage, no car loans or any loans. Over the past few months we noticed that we can live comfortably on all this and never used RMDs. Both of us have IRA and ROTH-IRA accounts and also a taxable investment account. Enough liquid funds in the bank for emergency or just for comfortable feeling. We stopped funding our ROTH-IRAs last year, right before retirement. I am hoping that we will try living on a fixed income for the foreseeable future, maybe even up till we turn 72, when we will be forced into RMD (seems a good problem to have...)

I started thinking: is keeping all our accumulated investments untouched in IRAs the best idea? What else can we do with them over a few years? Maybe, start making some withdrawals and putting them--where? Obviously, not in the bank. Maybe, re-start funding ROTHs with it? Any other ideas?

Thank you all.

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22 Replies
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Frequent Contributor

Re: not needing RMD--what to do

Convert T-IRA to R-IRA gradually without bumping into the next tax bracket.

YBB
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Explorer ○

Re: not needing RMD--what to do

Talk to a good tax accountant.

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Frequent Contributor

Re: not needing RMD--what to do

Hi umnity...couple questions:

--Do you have i as heirs?

--Are you and spouse reasonably healthy?

--Are you aware of loss of "stretch" in IRAs for heirs other than spouse?  Is this your concern?

--What really is your concern?  Keeping in IRAs until RMD time seems best...what is the issue?  Taking RMDs when you don't need them?  What to invest in?  Where is the problem?

Thanks in advance...

R48

 

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Contributor ○○○

Re: not needing RMD--what to do


@retiredat48 wrote:

Hi umnity...couple questions:

--Do you have i as heirs?

--Are you and spouse reasonably healthy?

--Are you aware of loss of "stretch" in IRAs for heirs other than spouse?  Is this your concern?

--What really is your concern?  Keeping in IRAs until RMD time seems best...what is the issue?  Taking RMDs when you don't need them?  What to invest in?  Where is the problem?

Thanks in advance...

R48

 


I have the same questions.  I think tax free growth is ideal.  We didn't need MRDs from my traditional IRA either but I was required to take them at 70 1/2.  The government wants its taxes.  Since we don't need them we pay the taxes and reinvest the difference.

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Follower ○○○

Re: not needing RMD--what to do

Thank you all for your replies.

Re: retiredat48: Yes, my wife and I have each other as heirs. And both of us have our son as a heir and also we have 2 grand children who are mentioned in our wills.

We are "reasonably" healthy, but as with almost everybody at this age, not without some problems. So far, nothing life threatening.

The "loss of stretch" did not enter in the equation. For now, I am concerned with a fairly short-term strategy. If we are lucky enough to have our savings outlast us, we'll let our son make a right choice.

There was a reply, suggesting taking some withdrawals and gradually add to our ROTHs without "jumping the bracket". From my calculations, we can easily take out a max of $7000 annually and put them into ROTHs. Any hidden implications I am overlooking?

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Frequent Contributor

Re: not needing RMD--what to do


@umniy2000 wrote:

Thank you all for your replies.

Re: retiredat48: Yes, my wife and I have each other as heirs. And both of us have our son as a heir and also we have 2 grand children who are mentioned in our wills.

We are "reasonably" healthy, but as with almost everybody at this age, not without some problems. So far, nothing life threatening.

The "loss of stretch" did not enter in the equation. For now, I am concerned with a fairly short-term strategy. If we are lucky enough to have our savings outlast us, we'll let our son make a right choice.

There was a reply, suggesting taking some withdrawals and gradually add to our ROTHs without "jumping the bracket". From my calculations, we can easily take out a max of $7000 annually and put them into ROTHs. Any hidden implications I am overlooking?


I probably should have asked two more things:

--What is your marginal income tax rate now?  Meaning if you earned one more dollar, what rate would it be taxed at?  12% or less?

--What is approx size of the IRAs?  Like more than 500K?  Less than 100K?   More than a million?

Thanks in advance...

R48

 

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Follower ○○○

Re: not needing RMD--what to do

Thanks for the replies R48.

This will be the first year when I and my wife did not work. I ran some estimates and we should be in either 10% or 12% tax bracket.

My IRA amount is a few hundred $K. The other three retirement accounts are all below $100K. Taxable investments are in between.

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Explorer ○

Re: not needing RMD--what to do

We converted all our T-IRAs to Roths.  You now have a 7 year window to do the same, and I think it would save you a lot of taxes going forward.  When you start to take RMDs from a several hundred K IRA, that will not only cause large taxes, but will also cause your SS to be taxed. Just my opinion, of course.

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Frequent Contributor

Re: not needing RMD--what to do


@gina123 wrote:

We converted all our T-IRAs to Roths.  You now have a 7 year window to do the same, and I think it would save you a lot of taxes going forward.  When you start to take RMDs from a several hundred K IRA, that will not only cause large taxes, but will also cause your SS to be taxed. Just my opinion, of course.


And potentially higher Medicare premiums.

Several years ahead of my RMD age, I started converting T-IRA to R-IRA using the initial RMD rate [about 3.7% of December balance]. This didn't bump me into the next tax bracket, gave me an approximate figure to use for conversions, and was sort of a trial run/preview for future RMD. Of course, one can try to optimize this by doing more precise calculations to stay in the current tax bracket by projecting all taxable income.

In our particular situation, R-IRA came in late [1997- ] and income limits for conversion were removed only in 2010, so we had most of our balances in T-IRA, 401k/403b. But by the time my RMD started, I had almost 35% of balance in R-IRA.

YBB
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Frequent Contributor

Re: not needing RMD--what to do


@umniy2000 wrote:

Thanks for the replies R48.

This will be the first year when I and my wife did not work. I ran some estimates and we should be in either 10% or 12% tax bracket.

My IRA amount is a few hundred $K. The other three retirement accounts are all below $100K. Taxable investments are in between.


OK umniy2000...here's my guidance:

First, you do not have a significant RMD problem...as your initial post seemed to indicate a concern here.

There is no reason to withdraw from a tax advantaged space, until required to do so.  (Few do).  You do not need the RMD.  You are in same income and tax levels, whether you do it now, or wait...so wait.  

Continuing, the initial RMD percentage is a little over 3%.  So on a $200,000 IRA, your RMD is about $6000+.  At a 12% tax rate, this is $720.  Insignificant.  Letting the money grow tax tax-free in the IRA, now, will save you more than enough to outweigh this small increase in tax, at age 72.

Others have discussed converting to ROTHs, from now to age 72.  I agree, with caveats.  First, I would not go above 12% marginal tax rate.  That is, look at your income and taxes, and determine how much more income you can add, to get through the 12% bracket.  Consider impact on Soc Sec tax also.  Then convert Trad to ROTH IRA, each year, considering not going above 12% rate.  

There is a big however, however.  

The new IRA rules mean both Trad and ROTH IRAs, when inherited by kids (other than spouse) , must be withdrawn within 10 years...can be lump sum at end.  This means, depending on your kids tax bracket, they may or may not have a big problem with this, for they have to add on the annual IRA takeout, to their own pay/salary.  So, if your kids are going to be max 12% rate, then you could do no conversions, have them eventually inherit max IRAs, and they take distributions over ten years, and pay the tax.  This means not paying taxes NOW to the gvt...and you let your money grow to the maximum.

Be aware you and spouse should inherit the IRAs as beneficiary on the "first to die"...as no 10 year withdrawal rule applies to spouses.  Ensure, or change to this, in IRA beneficiary designations.

Also, remember your kids can do things like take a year sabbatical, and cash in much more of the IRA during their 10 year time period.  My kids (late forties age) already have this planned!  

In summary, you have no RMD problem in the future...relax.  Second, generally, do not pay the gvt taxes now, when it can be deferred and paid later...maybe under tax rules even more favorable.  Going to annual conversions Trad to Roth now, are OK if kept to 12% or less tax.  Spend any money you need to live on, from taxable accounts, to reduce the taxable income from them, as time goes by.  Like, my holdings are now about 95% IRAs, as I have spent down taxable accounts, retiring early.

Best wishes, and glad if I helped.

R48

 

 

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Follower ○○○

Re: not needing RMD--what to do

Dear R48 and others,

Thank you for your help. Now I have a better understanding. And along the discussion, it dawned on me that I have a second question. As I said, I have a not insignificant amount in taxable investments, which I started many years ago. Then we worked and had extra income, way above what we could spend and stash in all retirement accounts. Do you see any problems if I transfer from it a max of $7K each (total $14K) every year in our ROTH? Now unlike before, as we reached 65, we can get money from retirement accounts, if needed.

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Explorer ○

Re: not needing RMD--what to do

I also support conversion to Roth if you can do so without a substantial increase in your tax bracket.

Also be aware that your MAGI (AGI plus Muni Bond income) for this year could affect your Medicare Part B&D premiums in 2022.  The first break point for a couple right now is $174,000, but this will increase for inflation two times before the base is set for 2022.  This is particularly onerous because this is a step function, and because you will lose the "hold harmless" provision which guarantees that any potential Medicare premium increase will be no greater than your Social Security annual payment increase.

If you can pay for the conversion with after-tax funds, then that is a real advantage.  Essentially, the act of conversion allows you take the tax portion and move it from your after-tax account to your Roth.

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Explorer ○

Re: not needing RMD--what to do

You have to have earned income to make an annual contribution to your Roth account.  Otherwise, the only way to move money into your Roth account is by a Roth conversion.

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Explorer ○

Re: not needing RMD--what to do

More reasons to convert:

- kids may have to withdraw Roth over 10 years but it's still tax free

- should you ever want to take a very large withdrawal for whatever reason, you  don't have to worry about the increase in taxes

- tax rates go up substantially when there's only one remaining spouse.

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Frequent Contributor

Re: not needing RMD--what to do

I think that OP mention of $7K may be confusing the issue as that is the contribution limit for 50+ if there is earned income.

There is no limit on the amount of conversion from T-IRA to R-IRA, and there is no income limit either, but as mentioned before, conversion shouldn't put one in a higher tax bracket.

Of course, taxes can come from taxable funds. When converting, choose not-withhold option for taxes and send estimated taxes [online or via snail mail].

YBB
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Frequent Contributor

Re: not needing RMD--what to do


@yogibearbull wrote:

Convert T-IRA to R-IRA gradually without bumping into the next tax bracket.


I am too late for the conversion party, only a few years left till RMD (having some existing Roth IRA and Roth 403b).  I have a good tax accountant.  

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Frequent Contributor

Re: not needing RMD--what to do


@umniy2000 wrote:

Dear R48 and others,

Thank you for your help. Now I have a better understanding. And along the discussion, it dawned on me that I have a second question. As I said, I have a not insignificant amount in taxable investments, which I started many years ago. Then we worked and had extra income, way above what we could spend and stash in all retirement accounts. Do you see any problems if I transfer from it a max of $7K each (total $14K) every year in our ROTH? Now unlike before, as we reached 65, we can get money from retirement accounts, if needed.


As Yogi said, there is no limit to amounts you may convert, from Trad to Roth.

HOWEVER...you need EARNED INCOME  (as in, employment income from a job), to move money from taxable accounts to any IRA.  You will not have earned income when retired.

Here's a great suggestion for you:  Put your taxable account monies in any stock funds, into ETFs  (if you can do so w/o much cap gains tax).  Why?  Because ETFs have this special tax status from the IRS, that their operations of buying/selling underlying companies, does not result in capital gains.  OEF funds do not have this advantage.  So the annual cap gains payout from ETFs is negligible...not so for eofs.

So if, in taxable, you buy a USA small cap growth stock fund, each year you get about zero in dividends (no taxes), and your cap gains will be near zero.  Thus you have an IRA-like situation in taxable.

Investigate the tax aspects of ETFs...they fit you well.

R48

 

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Follower ○○○

Re: not needing RMD--what to do

To R48:

Boy, are you giving me great ideas! I think I am up to speed on ROTH conversion, earned income, etc. And I did not want to muddy the water by starting discussing my assets in various portfolios. But now, since you are getting down to nitty-gritty, may I use you guys for a little more?

Following R48 advice on having certain ETFs in a taxable portf., I got back to analyzing it. I have two funds in there: 98% Wellesley VWIAX and 2% Vanguard VDIGX (dividend growth). I know, most of you will probably frown at me for a wrong asset pick. Over years, especially when I started getting closer to retirement, I simply fell in love with Wellesley for its performance and low volatility during any market cycles. I thought I'd rather have a steady performer with somewhat lower returns, but also a much lower risk of losing when the going is tough and I accidentally need money from it, which then will not be just a paper loss. Of course, having a large bonds component is tax-detrimental.

I think, dealing with VDIGX on par should be easy. Just replacing it with say, VIG ETF. But both are paying nice dividends, which goes against R48 idea. Going the small cap ETF route: say Vanguard VBK pays very little dividends. But I am a little nervous during COVID and looking post-COVID environment. There is a train of thoughts that small companies (and in certain industries) may not fare well. Similarly, that dividend payers will cut back on dividends during multi-year market slump and  under-perform growth stocks. So, people are suggesting favoring technology, especially cloud, "home buddies" stocks, etc. I am keeping my eye on a few of those: VGT, PBJ, WFH. Will they make sense in terms of R48 tax efficiency idea? Their tax cost ratios in M* chart are a small fraction of 1%.

Now, what should I do about Wellesley in taxable? Bite a bullet and replace with what? Any much more tax-efficient ETF that is remotely close to its volatility and performance?

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Participant ○○○

Re: not needing RMD--what to do


@umniy2000 wrote:

Thanks for the replies R48.

This will be the first year when I and my wife did not work. I ran some estimates and we should be in either 10% or 12% tax bracket.

My IRA amount is a few hundred $K. The other three retirement accounts are all below $100K. Taxable investments are in between.


@umniy2000 @retiredat48 

First, congrats on a low-stress financial situation for your retirement!

Retiredat48 is correct, at say $300,000 in T-IRAs, there is really not that much to sweat.  However, that $300,000 could easily still be 300,000 (or more) even after RMDs kick in (depending on last-to-die realities).  As we don't know your son's likely tax rate when he inherits this asset ... so it's hard to advise.  

If you think that it likely is not an issue for your heir, I agree with R48 and would simply let RMDs happen.  

However, if it *might* be an issue, I'd max out the 12% bracket.  The good news on this is that you indicated that you're either at the top of the 10% bracket or the bottom of the 12% bracket.  The math on this means (roughly) that you could take convert approximately $30,000 each year from a T-IRA to a ROTH and still be in the 12% bracket.  So, 7 years of that and you've converted $210,000 by 72.  And as RMD conversions start small, you'll probably be able to convert the rest at $20,000 per year until it's all in converted if your son is doing really well.  If not, done and done.        

Candidly, in my view, after all those years of tax-deferred growth, paying only 12% at the Federal level is a heck of a deal.  And because you are at the very top of the 10% bracket now, with RMDs, eventually you'd likely be in the 12% bracket anyway.       

Best of luck

ctyankee 

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