tIRA's RMDs causing increasing tax concerns

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RadAudit
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tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

RMDs from a tIRA will push me into a 25% marginal income tax bracket from a 15% marginal income tax bracket. (Yes. I know others have bigger tax problems. I'm grateful I don't have those problems. And, I appreciated the tax avoidance I've experienced - to one extent or another - for more than 44 years.)

91% of my financial assets are in a tax advantaged account. Most of the rest of the assets are in tax efficient investments (TSM, municipals) in a taxable account. It's too late for Roth conversions to lower RMDs by any appreciable amount that would avoid the projected tax increase. Once the RMDs are distributed, I'm currently thinking of putting the remainder above my SWR into a municipal bond fund.

I'm getting by fairly well right now on a small pension, a little SS and some withdrawals from the taxable account.

Is there anything else I ought to be doing to avoid the projected increase in taxes?
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Re: tIRA's RMDs causing increasing tax concerns

Post by randomguy »

The way to avoid this is to deferr SS til 70 AND spend down the tax deferred accounts instead of taxable. Shifting the tax deferred account to low growth (i.e. bonds while taxable gets the stocks) also reduces future RMDs growth issues. Obviously without knowing your situation, it is impossible to say what you can do at this point of time. You could always donate the RMD if you don't need the money and would prefer that to paying taxes.
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Re: tIRA's RMDs causing increasing tax concerns

Post by dodecahedron »

Idea 1: Find a part-time job you enjoy and want to do indefinitely, a job at an employer with 401k or 403b that will allow you to roll your tIRA funds into their plan. Then, no RMDs as long as you are working there. This gives you additional years to gradually Roth convert assets (and even to make more contributions to a Roth based on your part-time earnings.)

Idea 2: Delay planned charitable donations to your RMD years (when they will be worth more; plus you can donate appreciated shares, which will hopefully have grown more in the intervening period)
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Re: tIRA's RMDs causing increasing tax concerns

Post by dolphinsaremammals »

RadAudit wrote:RMDs from a tIRA will push me into a 25% marginal income tax bracket from a 15% marginal income tax bracket. (Yes. I know others have bigger tax problems. I'm grateful I don't have those problems. And, I appreciated the tax avoidance I've experienced - to one extent or another - for more than 44 years.)

91% of my financial assets are in a tax advantaged account. Most of the rest of the assets are in tax efficient investments (TSM, municipals) in a taxable account. It's too late for Roth conversions to lower RMDs by any appreciable amount that would avoid the projected tax increase. Once the RMDs are distributed, I'm currently thinking of putting the remainder above my SWR into a municipal bond fund.

I'm getting by fairly well right now on a small pension, a little SS and some withdrawals from the taxable account.

Is there anything else I ought to be doing to avoid the projected increase in taxes?
What saves me is Schedule A.

Looking in the tax instructions for those rates, you must be living fairly comfortably. If you had giant medical bills or property taxes, for example, Schedule A would have jumped to your rescue, so I'm assuming you don't. So I would just pay the taxes. I certainly wouldn't get some random job when you'd prefer to be retired.

Minimizing taxes is one thing, but it doesn't make a lot of sense, imho, to twist yourself into a pretzel instead of just forking out what is due.
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Re: tIRA's RMDs causing increasing tax concerns

Post by BL »

Have you actually done a dummy tax calculation? At least 15% of your SS will not be taxed at all. The other 85% depends on your income, which we don't know. Also if you take standard deduction, 65+ get to take an extra 1200 each.

If you give to charity, congress may again pass the law extending QCD (they have been doing it in Dec or Jan for several years now), allowing you to designate contributions directly from your account to a charity. If done before RMD, it counts as your RMD with no taxes. You can give up to 100,000/yr, but every bit helps lower next year's RMD and replaces taxable money for donations. (You can't also itemize the same donation.)
By lowering MAGI (reducing RMD income), QCDs could also affect SS taxation, again depending on whether or not 85% is taxed.
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Re: tIRA's RMDs causing increasing tax concerns

Post by sport »

If congress renews the law allowing qualified charitable deductions (QCD) from IRA accounts, you can make donations directly from your IRA to a qualified charity (s) of your choice. Those donations count against your RMD requirement, so they reduce your taxable income, even if you do not itemize deductions. They also may reduce state income tax if you have that. Congress has been renewing it for one or two years at a time, and in recent years they have been very late about doing it. :annoyed
So, there is still hope for this year, but no guarantee.
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Re: tIRA's RMDs causing increasing tax concerns

Post by JW-Retired »

RadAudit wrote:RMDs from a tIRA will push me into a 25% marginal income tax bracket from a 15% marginal income tax bracket. (Yes. I know others have bigger tax problems. I'm grateful I don't have those problems. And, I appreciated the tax avoidance I've experienced - to one extent or another - for more than 44 years.)

91% of my financial assets are in a tax advantaged account. Most of the rest of the assets are in tax efficient investments (TSM, municipals) in a taxable account. It's too late for Roth conversions to lower RMDs by any appreciable amount that would avoid the projected tax increase. Once the RMDs are distributed, I'm currently thinking of putting the remainder above my SWR into a municipal bond fund.

I'm getting by fairly well right now on a small pension, a little SS and some withdrawals from the taxable account.

Is there anything else I ought to be doing to avoid the projected increase in taxes?
The big way to reduce total post-RMD taxes is to delay SS and spend down the IRA instead. Is it too late for that?
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Re: tIRA's RMDs causing increasing tax concerns

Post by bsteiner »

JW Nearly Retired wrote:...The big way to reduce total post-RMD taxes is to delay SS and spend down the IRA instead. Is it too late for that?
If there are no spouse benefits, is that beneficial? Absent spouse benefits, Social Security is supposed to be approximately fair whether you start at 66 or 70, whereas there's a significant benefit to keeping as much money in your IRA for as long as you can.
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Re: tIRA's RMDs causing increasing tax concerns

Post by JW-Retired »

bsteiner wrote:
JW Nearly Retired wrote:...The big way to reduce total post-RMD taxes is to delay SS and spend down the IRA instead. Is it too late for that?
If there are no spouse benefits, is that beneficial? Absent spouse benefits, Social Security is supposed to be approximately fair whether you start at 66 or 70, whereas there's a significant benefit to keeping as much money in your IRA for as long as you can.
Yes, IMO beneficial. Spouse & survivor benefits add to SS delay advantages but so do tax considerations. Even if you are high income, no more than 85% of SS is taxed and most states do not tax it at all. That's like a couple of tax brackets tax advantage for lots of us right there. If you are moderate income in the 15% or 25% nominal bracket you could find you are paying double or more the marginal tax rate on your RMD dollars compared to your SS dollars. If you are in the nominal 25% bracket, actual RMD marginal tax rates range to as high as 46.25% (+state tax) during the income range where the tax on SS is phasing in.

Personally, we are well past the 85% of SS is taxed threshold but our SS dollars are still worth quite a lot more after IRS & state taxes. What-ifs with our 2014 tax software says we got to keep precisely 70.2% of a marginal SS dollar versus only 55.7% of a marginal pension/RMD dollar.

I think this chart shows nicely how taxes get reduced if you can replace some of your other income with boosted SS.
http://www.bogleheads.org/forum/viewtop ... 3#p2502764
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Re: tIRA's RMDs causing increasing tax concerns

Post by Carl53 »

As others have suggested QCDs may be available in addition to the standard deduction. I would presume so until otherwise proven. At worst, if it is money that you would otherwise have donated, you are only looking at the 25% tax savings that might be lost if they do not renew it.

Use a tax program to determine what your true marginal bracket is. Add $1000 to your taxable income as interest or however you want to do it and see how much the tax goes up. If $250, then you are in the 25% bracket, likely in the range above where all of your SS is already taxed. I would suggest that you consider converting an amount of your TIRA to a Roth that would get you to the top of your 25% bracket. You might find that you incur up to $462.50 in additional tax. You probably would find that a few thousand of income would drop your top rate to 25% once all of your SS is taxed. In this situation still consider converting up to the top of the 25% bracket. Doing this for a couple of years might reduce future RMDs such that not all of your SS is any longer taxed, or that your marginal bracket drops back to the 15% level. I see from a previous post that you have a spouse and adult children. Should one of you pass the remaining spouse will likely be pushed even higher into the tax bracket, but may not all the way to 28%. Also, consider what the tax brackets of your heirs are. There may be little point in converting at 25% if your TIRA beneficiaries have lower top tax brackets.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Electron »

RadAudit wrote:It's too late for Roth conversions to lower RMDs by any appreciable amount that would avoid the projected tax increase.
I might take another look at Roth Conversions. Depending on your current and future tax brackets, it's possible that a few conversions over the next few years could provide a benefit. It may depend on how much empty space is available in your current tax bracket and the average return in the coming years.

Also consider the actual size of the RMDs in dollars over time. If your IRA has a return close to 0%, the RMD in dollars will actually decline from the start. If the return is 2%, the RMD in dollars will peak around age 85. Increase the return to 4%, and the RMD will peak around age 93. These numbers assume taking the standard RMD percentages specified by the IRS table.
Last edited by Electron on Sat Jun 13, 2015 3:52 pm, edited 1 time in total.
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Re: tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

Thank you all for your time and ideas.

You've given me a lot to work on.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Alan S. »

You might also consider a QLAC, particularly if you do not have LTC insurance.

The max premium as of today is 125k, but if your TIRA generates a return of 6% annually, the value excluded from your RMD balance will grow to 300k by age 85. In the meantime, this may save you on IRMAA premium surcharges in addition to income taxes. IRMAA is the current non inflation adjusted Medicare surcharge which is certain to nail all 25% bracket taxpayers in the future, just as taxable SS income has done in the last two decades. If you have no need for LTC at 85 when the QLAC deferred annuity must go into payment mode, you will obviously pay more in taxes at that time. But if you do have LTC bills, the medical deduction will offset some portion of the additional taxable income after age 85.

https://s3.amazonaws.com/public-inspect ... -15524.pdf
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Re: tIRA's RMDs causing increasing tax concerns

Post by Electron »

Here is something that may be of interest to everyone. RMDs in dollars may increase quite a bit after age 70.5 depending on the returns achieved within the IRA.

The following data assumes the standard RMD from the IRS Table and a constant return every year in the IRA. The first RMD Divisor is 27.4. Some individuals will start with an RMD Divisor of 26.5 depending on their birth month.

Code: Select all

Return  Ratio Peak RMD/First RMD

3.0%    1.448
4.0%    1.786
5.0%    2.257
6.0%    2.888
7.0%    3.797
8.0%    5.019
A high return within an IRA could impact the marginal tax bracket seen later in retirement.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Lynette »

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Re: tIRA's RMDs causing increasing tax concerns

Post by grabiner »

Lynette wrote:Thank you for raising this issue. If I live into my nineties, like my mother this could happen to me as well. I always thought I would be in a lower tax bracket when I retired but I won't as I have pensions and like the OP most of my savings are in tax advantaged accounts. I'm still working at 71 but I plan to retire soon. As a result, I've stopped putting the maximum into my 401K. I'm building up cash reserves so that I can travel a lot no matter what the economy does.
If putting the money into your 401(k) gives you tax savings you don't need, then you can pay the same amount of tax as if you had a taxable investment, by maxing out your 401(k) and converting an equal amount of your IRA to a Roth IRA. This is better than a taxable investment, since the Roth IRA grows tax-free, while in your taxable account, you will pay tax on dividends even if you don't sell.

And you can still hold the cash for money that you want to spend soon, either in your taxable account or in your IRA. (Given the current low yields on cash, it's better to have cash in the taxable account and either stocks or longer-term bonds in your IRA or 401(k).)
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Re: tIRA's RMDs causing increasing tax concerns

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Re: tIRA's RMDs causing increasing tax concerns

Post by grabiner »

Lynette wrote:Thanks for the advice. I want to retire in about 2 years time and I want simplicity even if I forego a few dollars. I have lots of options in my 401K such as a Roth, after-tax to do a backdoor Roth. Part of the problem with contributing to a Roth in my 401K is that there is a 5-year time limit before I can do a rollover.
Is this an employer rule, or are you confusing it with the 5-year tax rule? I would think that you can roll a Roth 401(k) to a Roth IRA without penalty, although you will owe taxes on the earnings if you withdraw the money within five years of opening the Roth account.
I believe that when I retire part of the money I have in my Roth 401K is also subject to RMDs.
This is true if the money is still in the Roth 401(k); if you roll it to a Roth IRA, there is no RMD.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Lynette »

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Re: tIRA's RMDs causing increasing tax concerns

Post by JW-Retired »

Lynette wrote:It is an employer rule that I cannot roll over a Roth 401K to a Roth IRA until it has met their 5 year time period. I think this is the case as I spent hours on the phone with HR and read and re-read the plan. I plan to retire before the 5-year time period is up. My accountant is charging me for all of these questions I ask such as backdoor Roth using after tax money. If I do that before I retire, the earnings would have to go into an IRA. That money would be subject to RMDs. That would not be a large amount but it adds complication to my life.

If I were younger, it would be to my advantage to take advantage of some of these strategies but my company only started to offer a Roth 401K recently. I was not aware of the potential of the after-tax Roth Backdoor until I found this site.

Thanks,

Lynette
As you are over 70.5 you can't do a backdoor Roth because nobody over 70.5 can do the tIRA contribution step. There is no such age limitation for direct Roth IRA contributions but it appears you are over the income limit to do those. So you are stuck. I'm familiar with this because the same thing has stopped me.
http://www.irs.gov/Retirement-Plans/Pla ... ion-Limits

Why not just use the Roth 401k and wait to roll it over to a Roth IRA until you retire?
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Re: tIRA's RMDs causing increasing tax concerns

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Re: tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

Electron wrote:I might take another look at Roth Conversions.
I really appreciate you all's input. I'm not picking on Electron. It's just he offered one of the first ideas I might have a chance of understanding and calculating. But, I'm probably doing this wrong - so please chime in with corrections.

If I do a Roth conversion in the 15% marginal income tax bracket to avoid paying taxes at 25% when RMDs kick in, I figure I'd need a time horizon of at least 8 years before breaking even on that move. ($15 @ 7% / yr. increases to $25 in about 8 years?). That's of course if the portfolio generates a 7% annual return. Is that the way to look at that? Of course, after 8 years things look better.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Carl53 »

RadAudit wrote:
Electron wrote:I might take another look at Roth Conversions.
I really appreciate you all's input. I'm not picking on Electron. It's just he offered one of the first ideas I might have a chance of understanding and calculating. But, I'm probably doing this wrong - so please chime in with corrections.

If I do a Roth conversion in the 15% marginal income tax bracket to avoid paying taxes at 25% when RMDs kick in, I figure I'd need a time horizon of at least 8 years before breaking even on that move. ($15 @ 7% / yr. increases to $25 in about 8 years?). That's of course if the portfolio generates a 7% annual return. Is that the way to look at that? Of course, after 8 years things look better.
Ignoring state taxes, oh I wish we all lived in zero income tax states.

If you convert $1000 while in the 15% bracket, worst case would be that you had to take some of the proceeds and pay the $150 tax. In this case you would have $850 in the Roth. In 8 years, assuming it garnered a 7% return, your Roth would be worth $1460.46.

If you had waited to take the $1000 equivalent now which would have grown to $1718.19 in a TIRA in 8 years, you would owe 25% tax if it works out that way, and net $1288.64. If the $1000 in withdrawal in that year cause an extra $850 of your SS to be taxed, it would be like getting only $1076.14 out of your TIRA.
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Re: tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

Carl53 wrote:If you convert $1000 while in the 15% bracket, worst case would be that you had to take some of the proceeds and pay the $150 tax. In this case you would have $850 in the Roth. In 8 years, assuming it garnered a 7% return, your Roth would be worth $1460.46.

If you had waited to take the $1000 equivalent now which would have grown to $1718.19 in a TIRA in 8 years, you would owe 25% tax if it works out that way, and net $1288.64. If the $1000 in withdrawal in that year cause an extra $850 of your SS to be taxed, it would be like getting only $1076.14 out of your TIRA.
Carl53, thanks for running the numbers. I knew it couldn't be as simple as I had originally thought. The possibility of a $76.14 gain - net after taxes - after 8 years combined with the probability of achieving a 7% / yr return on a conservative portfolio makes for some interesting risk adjusted returns to avoid some taxes.

I'm beginning to think someone at the Treasury Department pushed a lot of numbers around a page before I got here. I'd hate to run similar numbers for taking SS at 70 1/2 versus 62. I suspect that'd be disappointing as well even if the increase in SS across those 8 years is ~ 7% / yr.
dolphinsaremammals wrote:Minimizing taxes is one thing, but it doesn't make a lot of sense, imho, to twist yourself into a pretzel instead of just forking out what is due.
You may be on to something.
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Re: tIRA's RMDs causing increasing tax concerns

Post by House Blend »

RadAudit wrote:If I do a Roth conversion in the 15% marginal income tax bracket to avoid paying taxes at 25% when RMDs kick in, I figure I'd need a time horizon of at least 8 years before breaking even on that move. ($15 @ 7% / yr. increases to $25 in about 8 years?). That's of course if the portfolio generates a 7% annual return. Is that the way to look at that? Of course, after 8 years things look better.
I wouldn't look at it that way. The only way to avoid having tax-deferred dollars exposed (eventually) to income tax, either yours or your beneficiaries, is to donate those dollars to charity. (Perhaps a charity *is* the beneficiary.)

Absent a charitable angle, given a choice of 15% now versus having every dollar of every future withdrawal taxed at 25%, conversion at 15% is a no-brainer. Breaking even never occurs; you are ahead of the game and stay that way from day 1.

The only problem with such a proposition is that real life is rarely that clear cut. First, given that you already have SS income and "some withdrawals from the taxable account", and haven't mentioned state income taxes, it is highly plausible that your current marginal tax rate is something other than 15%.

Second, it is highly plausible, even without changes in the tax code, that not every dollar of your future RMDs will be taxed at 25%. For example, your trad IRA could be inherited by someone in a different tax bracket (Fed or state).
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Re: tIRA's RMDs causing increasing tax concerns

Post by Electron »

RadAudit wrote:If I do a Roth conversion in the 15% marginal income tax bracket to avoid paying taxes at 25% when RMDs kick in, I figure I'd need a time horizon of at least 8 years before breaking even on that move. ($15 @ 7% / yr. increases to $25 in about 8 years?). That's of course if the portfolio generates a 7% annual return. Is that the way to look at that?
When evaluating Roth Conversions, I always compare the After Tax values of the two accounts. We only own a portion of our Traditional IRAs. As an example, a $10,000 tIRA in a 25% marginal tax bracket is worth essentially the same as a $7500 Roth IRA on an after tax basis.

If you do have space remaining in the 15% bracket for the next several years, it would be worth doing Roth Conversions if your marginal tax bracket will be higher after age 70.5. If extra money is available at the time of conversion, you can also benefit by paying the taxes from savings rather than from the tIRA. In this case you could convert $1000 from a tIRA worth perhaps $850 after tax but wind up with $1000 in a Roth IRA.

Here is an update on the information I provided earlier. Depending on the return, the RMD from a Traditional IRA can increase quite a bit over time. That can result in a higher marginal tax bracket than expected. A Roth Conversion could pay off more than expected depending on future returns. The table shows the ratio of the highest RMD to the first RMD which is taken after age 70.

Code: Select all

Return  Ratio of Peak RMD to First RMD

0.0%    1.000	Peak RMD at Age 70
0.5%    1.006	Peak RMD at Age 76
1.0%    1.045	Peak RMD at Age 79
2.0%    1.201	Peak RMD at Age 85
3.0%    1.448	Peak RMD at Age 89
4.0%    1.786	Peak RMD at Age 93
5.0%    2.257	Peak RMD at Age 93
6.0%    2.888	Peak RMD at Age 96
7.0%    3.797	Peak RMD at Age 98
8.0%    5.019	Peak RMD at Age 98
9.0%    6.656	Peak RMD at Age 100
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Re: tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

House Blend wrote: The only way to avoid having tax-deferred dollars exposed (eventually) to income tax, either yours or your beneficiaries, is to donate those dollars to charity. (Perhaps a charity *is* the beneficiary.)
I'm beginning to understand there are certain immutable truths in this world and this might be one of them.
House Blend wrote:Second, it is highly plausible, even without changes in the tax code, that not every dollar of your future RMDs will be taxed at 25%. For example, your trad IRA could be inherited by someone in a different tax bracket (Fed or state).
Good point.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Electron »

It should be fairly easy to determine if space is available in the 15% bracket.

The top of the 15% bracket for a couple in 2014 was $73.8K. If you now add the Standard Deduction and Exemptions you will have a total ranging from $94.1K to $96.5K depending on the age of each spouse. That figure would be the maximum income that would not exceed the 15% tax bracket. The amount would be higher if Itemized Deductions are higher than the Standard Deduction.

The numbers will be higher for 2015. A similar calculation can be done for a single return.
Last edited by Electron on Mon Jun 15, 2015 12:42 pm, edited 1 time in total.
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Post by kaneohe »

Electron wrote:It should be fairly easy to determine if space is available in the 15% bracket.

............................................ Do not include Qualified Dividends or Capital Gains since those are taxed separately.
Electron, if you do this and don't include QDIV/LTCG, in filling up the 15% bracket w/ ordinary income from a Roth conversion, don't you
effectively do the conversion at 30% (because of the promotion of QDIV/LTCG in to the 25% bracket where it is taxed at 15%. That marginal rate might then be higher than the 25% rate expected in retirement.
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Post by Electron »

kaneohe wrote:Electron, if you do this and don't include QDIV/LTCG, in filling up the 15% bracket w/ ordinary income from a Roth conversion, don't you effectively do the conversion at 30% (because of the promotion of QDIV/LTCG in to the 25% bracket where it is taxed at 15%. That marginal rate might then be higher than the 25% rate expected in retirement.
Thanks for the correction. The conversion would only see a full 30% marginal tax rate if Qualified Dividends and Capital Gains extended to the top of the 15% bracket. I was just thinking in terms of the maximum amount of ordinary income that could fit within the 15% bracket. As you pointed out, you want to include Qualified Dividends and Capital Gains within the 10% and 15% brackets where they are actually taxed at 0%. A potential Roth Conversion would take advantage of any empty space remaining in the 15% bracket taking into account all types of taxable income.

I just looked at the 2015 tax rates, deductions, and exemptions. It appears that the Ordinary Income, Qualified Dividends, and Capital Gains can now total between $95.5K and $98K and remain within the 15% bracket.
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Re: tIRA's RMDs causing increasing tax concerns

Post by House Blend »

Electron,

As I pointed out in my previous post, the tax cost of a Roth conversion depends on your marginal tax rate for ordinary income (and how it changes as you increase the conversion amount). Simply having taxable income in the 15% bracket does not mean that your marginal rate is 15%.

Now that you have allowed for the fact that the QDI/LTCG actually counts toward taxable income (even though it is taxed at a rate of 0% in the 15% bracket), you should next recognize that the OP has SS income.

In that situation (SS income + 15% bracket), and nothing else fancy going on with his tax return, it is very likely that his marginal tax rate is 22.5% or 27.75%.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

In addition, the total amount of "other income" it takes to hit the top of the 15% bracket depends in a messy way on exactly how much SS income you have. This is true even if you are claiming the standard deduction.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Allan »

I have reconciled myself that the 25% rate is the new 15%. If both spouses wait until 70 for Soc Sec and you have a healthy IRA/401k, with RMD's and any additional income sources, your marginal tax rate in your 70's and 80's could be 25% (or higher).

Allan
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Re: tIRA's RMDs causing increasing tax concerns

Post by cherijoh »

grabiner wrote:
Lynette wrote:Thanks for the advice. I want to retire in about 2 years time and I want simplicity even if I forego a few dollars. I have lots of options in my 401K such as a Roth, after-tax to do a backdoor Roth. Part of the problem with contributing to a Roth in my 401K is that there is a 5-year time limit before I can do a rollover.
Is this an employer rule, or are you confusing it with the 5-year tax rule? I would think that you can roll a Roth 401(k) to a Roth IRA without penalty, although you will owe taxes on the earnings if you withdraw the money within five years of opening the Roth account.
I believe that when I retire part of the money I have in my Roth 401K is also subject to RMDs.
This is true if the money is still in the Roth 401(k); if you roll it to a Roth IRA, there is no RMD.
+1 I also think Lynette is confused. See this IRS FAQ on Roth 401k plans:
How is the 5-taxable-year period calculated when I roll over a distribution from a designated Roth account to a Roth IRA?

When you roll over a distribution from a designated Roth account to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count toward the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if you had contributed to any Roth IRA in a prior year, the 5-taxable-year period for determining qualified distributions from a Roth IRA is measured from the earlier contribution. So, if the earlier contribution was made more than 5 years ago and you are over 59 ½ a distribution of amounts attributable to a rollover contribution from a designated Roth account would be a qualified distribution from the Roth IRA.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Lynette »

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Last edited by Lynette on Sat Jan 12, 2019 4:04 am, edited 1 time in total.
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Re: tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

dolphinsaremammals wrote:What saves me is Schedule A.
Good point. There'll alway be an unexpected expense somewhere to pull you out of a higher tax bracket - in case charitable deductions aren't enough.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
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Re: tIRA's RMDs causing increasing tax concerns

Post by jimkinny »

JW Nearly Retired wrote:
bsteiner wrote:
JW Nearly Retired wrote:...The big way to reduce total post-RMD taxes is to delay SS and spend down the IRA instead. Is it too late for that?
If there are no spouse benefits, is that beneficial? Absent spouse benefits, Social Security is supposed to be approximately fair whether you start at 66 or 70, whereas there's a significant benefit to keeping as much money in your IRA for as long as you can.
Yes, IMO beneficial. Spouse & survivor benefits add to SS delay advantages but so do tax considerations. Even if you are high income, no more than 85% of SS is taxed and most states do not tax it at all. That's like a couple of tax brackets tax advantage for lots of us right there. If you are moderate income in the 15% or 25% nominal bracket you could find you are paying double or more the marginal tax rate on your RMD dollars compared to your SS dollars. If you are in the nominal 25% bracket, actual RMD marginal tax rates range to as high as 46.25% (+state tax) during the income range where the tax on SS is phasing in.

Personally, we are well past the 85% of SS is taxed threshold but our SS dollars are still worth quite a lot more after IRS & state taxes. What-ifs with our 2014 tax software says we got to keep precisely 70.2% of a marginal SS dollar versus only 55.7% of a marginal pension/RMD dollar.

I think this chart shows nicely how taxes get reduced if you can replace some of your other income with boosted SS.
http://www.bogleheads.org/forum/viewtop ... 3#p2502764
JW
Very nice graph JW, thanks.

Jim
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Re: tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

jimkinny wrote: If you are moderate income in the 15% or 25% nominal bracket you could find you are paying double or more the marginal tax rate on your RMD dollars compared to your SS dollars. If you are in the nominal 25% bracket, actual RMD marginal tax rates range to as high as 46.25% (+state tax) during the income range where the tax on SS is phasing in.
Thanks for the graph and the explanation.
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Re: tIRA's RMDs causing increasing tax concerns

Post by jimkinny »

RadAudit wrote:
jimkinny wrote: If you are moderate income in the 15% or 25% nominal bracket you could find you are paying double or more the marginal tax rate on your RMD dollars compared to your SS dollars. If you are in the nominal 25% bracket, actual RMD marginal tax rates range to as high as 46.25% (+state tax) during the income range where the tax on SS is phasing in.
Thanks for the graph and the explanation.
I did not write this, JW wrote it, but thanks for the misplaced compliment.

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Re: tIRA's RMDs causing increasing tax concerns

Post by Electron »

House Blend - thanks for the input.

It appears that a Roth Conversion would not be advisable in this case if the marginal tax rate to convert is higher than the 25% tax rate expected after age 70.5. The marginal tax rate related to Social Security taxation might be 22.5% or 27.75%. Since we are talking about filling the 15% bracket, the higher rate would be in play. However, once Social Security is taxed at the full 85%, the marginal tax rate would revert to the base rate in play. I believe that typically occurs within the 15% bracket for a joint return so there may still be hope. The net tax difference for the conversion to the top of the 15% bracket would be the important number.

One should be able to test this case using Taxcaster or a similar program. Taxcaster does not handle tax exempt income but the results might be close if the tax exempt income is relatively small.

I just entered Wage Income and Social Security into Taxcaster and then added incremental income. In comparing the change in tax, I could see the 15% bracket progress to 27.75% and later fall back to 15%. With additional income the marginal tax rate eventually exceeded 15%. The Social Security 22.5% and 46.25% brackets showed up in a test case for a single return.

https://turbotax.intuit.com/tax-tools/c ... taxcaster/

The taxation of Social Security may have other impacts. Tax exempt income and capital gains in the 0% bracket both likely have a marginal tax rate at certain income levels as additional Social Security income is taxed.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Epsilon Delta »

Electron wrote:I believe that typically occurs within the 15% bracket for a joint return so there may still be hope. The net tax difference for the conversion to the top of the 15% bracket would be the important number.
If your planning using joint return numbers you should also look at what will happen when one of you is widow(er)ed. That spouse may be filing single for decades. Depending on the sources of income this can push the survivor up a bracket or two. This tends to favor Roth conversions when it's a wash or even a small loss just looking at the MFJ numbers.
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Re: tIRA's RMDs causing increasing tax concerns

Post by derosa »

What a great problem to have! I'm having to listen to my 87 year old father piss and moan about this exact same thing. And this includes an annuity that they haven't started drawing income on. He said since they don't need it let someone else pay the bill. Oh yeah.

Comment - You didn't pay the taxes before. You have to pay the taxes now. Didn't it seem like 'free' money 30 years ago? The bill just came due.

Another, much more extreme, solution is to die and let your beneficiaries deal with it?
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Re: tIRA's RMDs causing increasing tax concerns

Post by Ron »

Allan wrote:I have reconciled myself that the 25% rate is the new 15%.
I/we feel the same.

After paying the 25% marginal rate the last few years in retirement - the same rate as when we were both working, it's really not a big impact to us. It's not like it was a big increase in taxes over what we were used to paying. You also have to remember that if we were not paying the same rate as when we were working, we've probably have a retirement lifestyle that is less than when we were both working.

OTOH, it's not 25% on every dollar of income (same as working) and we do get sort of a "tax break", that is the 15% we're allowed to keep (non-taxable) from SS income. I feel that will change in the future, but it's something we really don't worry about today.

We're living well and paying for it. We don't have a problem with that...

- Ron
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Re: tIRA's RMDs causing increasing tax concerns

Post by RadAudit »

derosa wrote: You didn't pay the taxes before. You have to pay the taxes now.
Yes, that's true. And, I'm sure most of us aren't complaining; we're discussing alternatives.

While it is correct you usually have to pay taxes on money withdrawn from tax deferred (advantaged) accounts, you aren't under an obligation to necessarily pay the largest amount of tax possible on the withdrawal. There are more than one way to skin the tax cat - charity, Roth conversion, delayed SS, etc. It's instructive to weigh options and calculate probable outcomes.
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Re: tIRA's RMDs causing increasing tax concerns

Post by House Blend »

Electron wrote:It appears that a Roth Conversion would not be advisable in this case if the marginal tax rate to convert is higher than the 25% tax rate expected after age 70.5. The marginal tax rate related to Social Security taxation might be 22.5% or 27.75%. Since we are talking about filling the 15% bracket, the higher rate would be in play. However, once Social Security is taxed at the full 85%, the marginal tax rate would revert to the base rate in play. I believe that typically occurs within the 15% bracket for a joint return so there may still be hope. The net tax difference for the conversion to the top of the 15% bracket would be the important number.
Agreed.

In addition to the factor epsilon-delta mentioned, here's another reason why a Roth conversion might still be worthwhile. If SS income puts you in the zone where the marginal tax cost of a Roth conversion is 27.75%, and you will be in the 25% bracket when RMDs start, then it's possible that the last dollar of each RMD will be taxed at 46.25%.

Some quick calculations show that in order for an MFJ couple to be in danger of hitting the 46.25% rate during the RMD years, they need more than $45K of SS income. (Using 2015 tax brackets.) Quite do-able if the couple has two large PIAs.

The best case IMO is to have so much income that every SS dollar is 85% taxable. Less tax complexity, lower marginal rates, and more income is a win-win-win. ;-)
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Re: tIRA's RMDs causing increasing tax concerns

Post by trueblueky »

Electron wrote:
RadAudit wrote:If I do a Roth conversion in the 15% marginal income tax bracket to avoid paying taxes at 25% when RMDs kick in, I figure I'd need a time horizon of at least 8 years before breaking even on that move. ($15 @ 7% / yr. increases to $25 in about 8 years?). That's of course if the portfolio generates a 7% annual return. Is that the way to look at that?
When evaluating Roth Conversions, I always compare the After Tax values of the two accounts. We only own a portion of our Traditional IRAs. As an example, a $10,000 tIRA in a 25% marginal tax bracket is worth essentially the same as a $7500 Roth IRA on an after tax basis.

If you do have space remaining in the 15% bracket for the next several years, it would be worth doing Roth Conversions if your marginal tax bracket will be higher after age 70.5. If extra money is available at the time of conversion, you can also benefit by paying the taxes from savings rather than from the tIRA. In this case you could convert $1000 from a tIRA worth perhaps $850 after tax but wind up with $1000 in a Roth IRA.

Here is an update on the information I provided earlier. Depending on the return, the RMD from a Traditional IRA can increase quite a bit over time. That can result in a higher marginal tax bracket than expected. A Roth Conversion could pay off more than expected depending on future returns. The table shows the ratio of the highest RMD to the first RMD which is taken after age 70.

Code: Select all

Return  Ratio of Peak RMD to First RMD

0.0%    1.000	Peak RMD at Age 70
0.5%    1.006	Peak RMD at Age 76
1.0%    1.045	Peak RMD at Age 79
2.0%    1.201	Peak RMD at Age 85
3.0%    1.448	Peak RMD at Age 89
4.0%    1.786	Peak RMD at Age 93
5.0%    2.257	Peak RMD at Age 93
6.0%    2.888	Peak RMD at Age 96
7.0%    3.797	Peak RMD at Age 98
8.0%    5.019	Peak RMD at Age 98
9.0%    6.656	Peak RMD at Age 100
I probably missed it, but remember these returns have to be real since the tax brackets go up each year with inflation. However, the SS brackets don't change, which is a complication.

I think Roth conversion calculations are extremely complex. If you convert $1000 to Roth and pay $150 today, your RMD goes down around $40 (ignoring any gains in the meantime) the year you're 70.5 and every year thereafter. If you're withdrawing a set amount annually (more than RMD), you would only have paid the 25% on that $1000 when you withdrew the last $1000 from your account.
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Re: tIRA's RMDs causing increasing tax concerns

Post by bayview »

Lynette wrote:Thanks for the responses. I may be confused but as I mentioned previously I spent several hours on the phone with HR at different times. I also read my company's Plan several times. I think that I cannot roll over the earnings from my Roth 401K to a Roth IRA until it has met the five year period IN MY 401K - Plan - not IRS requirements.

I only plan to work for a few more years and it is not worth the hassle to me to deal with this. I can save a lot now as I have a salary, pension from a former employer and full SS (of course I'm taxed on it). I'll put the money into a Savings Account and blow it on travel when I retire. I'm also getting quotes to buy a new car.
Lynnette, I'm pretty sure that you are many miles ahead of me on this :D, but if you work 2 more years, there would only be another three years longer to wait before rolling over, correct? Three years of RMD's. Is that not a drop in the bucket with a good 20+ year projected lifespan, per your mother's experience?

I don't know how big a factor SS will be for you, but I find it maddening how RMD's impact SS income, which will be a significant chunk for DH and me. Taxation on SS from RMD's can ratchet you up into an unpleasant tax bracket PDQ.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Lynette »

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Re: tIRA's RMDs causing increasing tax concerns

Post by sport »

Lynette wrote:Well, I partially solved the problem of what to do with SS I am getting and don't need at the moment. I bought a new car this evening! I bought a 2015 model that had rebate of $8,000. The dealer said that this particular manufacturer was giving massive incentives on this car. That was far more fun that trying to figure out how to do a Backdoor Roth :D

I really do appreciate the contributions of so many knowledgeable people on Bogleheads.

Thanks,

Lynette
Lynette,
Would you care to share the name of the car with an 8K rebate?
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Re: tIRA's RMDs causing increasing tax concerns

Post by grabiner »

House Blend wrote:In addition to the factor epsilon-delta mentioned, here's another reason why a Roth conversion might still be worthwhile. If SS income puts you in the zone where the marginal tax cost of a Roth conversion is 27.75%, and you will be in the 25% bracket when RMDs start, then it's possible that the last dollar of each RMD will be taxed at 46.25%.

Some quick calculations show that in order for an MFJ couple to be in danger of hitting the 46.25% rate during the RMD years, they need more than $45K of SS income. (Using 2015 tax brackets.) Quite do-able if the couple has two large PIAs.
This is rather unlikely to matter for married taxpayers. Taxation of Social Security Benefits: Examples says that the couple would need $45,229 of Social Security benefits to have $1 taxed at 46.25%. If the SS is larger, there would be a very small interval taxed at 46.25% before the rate goes back to 25%; trying to fine-tune around this rate is probably not worth it.

Singles have more of an issue; a single taxpayer with $20,000 of SS already has a range of $3463 in the 46.25% marginal tax rate. It might also be relevant for formerly married taxpayers after one spouse dies; the surviving spouse will have either his or her own SS or a widow/er's benefit, and all the investments and RMDs of both spouses.
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Re: tIRA's RMDs causing increasing tax concerns

Post by Lynette »

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