Working on Planning RMDs - Should I stop Contributing

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WolfgangPauli
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Working on Planning RMDs - Should I stop Contributing

Post by WolfgangPauli »

Good Morning:

I am working on some retirement planning and the topic of RMDs continues to come up. The big question for me is if I should stop contributing to the 401(K) and non-deductible IRA as my RMDs are going to be significant (I believe). Here is my situation:

Me - Employed, access to and max out my 401K including catch up contributions. Also max out my non-deductible IRA ($7000)
Wife - not employed - we contribute maximum amount to spousal non deductible IRA ($7000)
2020 Effective Tax Rate: 29%
2020 Marginal Tax Rate: 37%

Breakdown of Retirement Investing:
  • Sum of IRAs (Me): $947,286
  • Sum of 401K: $687,017
  • Sum of Spousal IRA: $534,207
  • Cost Basis for Spousal iRA: $105,825
  • Cost Basis for My IRA: $100,825
Total in "RMD" type investments: $2,168,511

I am 58 and plan to work until at least 65 and have no reason right now to believe my ability to save at this rate (should I want to ) will be impeded. I have no debt (including no mortgage or rent) so there is really nothing else to do with the money.

So, my question: Should I stop putting into tax deferred accounts now and put it all in taxable accounts so I can control the withdrawals better and gain full Cap Gains benefit (Whatever that is)?

I have more than enough outside of the retirement accounts so not worried there.

Any thoughts? Any planning calculators out there to help me?

Thanks
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Kenkat
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Re: Working on Planning RMDs - Should I stop Contributing

Post by Kenkat »

With a 37% marginal tax rate, I can’t think of any reason not to continue to max the tax-deferred 401k contributions. It seems a fair bet your tax bracket in retirement will be lower and it can’t get any higher under current tax law. I would probably stop the non-deductible IRA contributions and push them into tax efficient investments like a total stock market index fund. You are not getting any tax advantages from the IRA contributions and any growth in the IRA will be taxed at your marginal rate vs. the capital gains rate of the taxable investment.
lazynovice
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Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

At a 37% marginal tax rate, yes you should continue to defer. Unless you have a pension, it is very unlikely that you will be in the 37% bracket in retirement with RMDs and social security alone.

Back Door Roths would be a better option than the nondeductible IRAs, but having non deductible IRAs complicate that.

Since you have large taxable accounts, you can carry your bond allocation in the deferred accounts and your equity allocation in the taxable accounts. That would slow the growth of the accounts and reduce future RMDs.
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anon_investor
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Re: Working on Planning RMDs - Should I stop Contributing

Post by anon_investor »

WolfgangPauli wrote: Sun Jun 13, 2021 8:46 am Good Morning:

I am working on some retirement planning and the topic of RMDs continues to come up. The big question for me is if I should stop contributing to the 401(K) and non-deductible IRA as my RMDs are going to be significant (I believe). Here is my situation:

Me - Employed, access to and max out my 401K including catch up contributions. Also max out my non-deductible IRA ($7000)
Wife - not employed - we contribute maximum amount to spousal non deductible IRA ($7000)
2020 Effective Tax Rate: 29%
2020 Marginal Tax Rate: 37%

Breakdown of Retirement Investing:
  • Sum of IRAs (Me): $947,286
  • Sum of 401K: $687,017
  • Sum of Spousal IRA: $534,207
  • Cost Basis for Spousal iRA: $105,825
  • Cost Basis for My IRA: $100,825
Total in "RMD" type investments: $2,168,511

I am 58 and plan to work until at least 65 and have no reason right now to believe my ability to save at this rate (should I want to ) will be impeded. I have no debt (including no mortgage or rent) so there is really nothing else to do with the money.

So, my question: Should I stop putting into tax deferred accounts now and put it all in taxable accounts so I can control the withdrawals better and gain full Cap Gains benefit (Whatever that is)?

I have more than enough outside of the retirement accounts so not worried there.

Any thoughts? Any planning calculators out there to help me?

Thanks
OP, can you rollover the pre-tax funds from your tIRA to your 401k, to allow you to do backdoor Roth IRA without pro-rata tax issues?
infotrader
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Re: Working on Planning RMDs - Should I stop Contributing

Post by infotrader »

You should continue to contribute:
1) Your current tax rate is pretty high, and will have lower tax after retirement.
2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on.
smitcat
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Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

infotrader wrote: Sun Jun 13, 2021 9:05 am You should continue to contribute:
1) Your current tax rate is pretty high, and will have lower tax after retirement.
2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on.
"2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on."
Please describe more about how this is easily delt with later on....
- OP has $2.17 mill in RMD accounts now
- at 58 now, will work to 65
- next 7 years will see more contributions and earnings
- both spouses have strong SS benefits
What are the details to easily deal with this after 65?
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TomatoTomahto
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Re: Working on Planning RMDs - Should I stop Contributing

Post by TomatoTomahto »

smitcat wrote: Sun Jun 13, 2021 9:36 am 2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on."
Please describe more about how this is easily delt with later on....
- OP has $2.17 mill in RMD accounts now
- at 58 now, will work to 65
- next 7 years will see more contributions and earnings
- both spouses have strong SS benefits
What are the details to easily deal with this after 65?
Haha, yeah, someone else’s tax bomb is easy to defuse, in theory, and as long as it belongs to someone else. :beer
Last edited by TomatoTomahto on Sun Jun 13, 2021 9:46 am, edited 1 time in total.
I get the FI part but not the RE part of FIRE.
Topic Author
WolfgangPauli
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Re: Working on Planning RMDs - Should I stop Contributing

Post by WolfgangPauli »

Great feedback thank you. I think stopping to contribute to the non deductibles is a good thing, especially given our age.

A couple of other data points:

1. I currently defer 35% of my income so when I "retire" I will have a good chunk come from there.
2. Our expenses are really low - as I said, no debt and we spend about $100K per year to live.. could easily do it on $70K to $80K. We have two homes and we will shed one at retirement which will decrease our expenses.

So far, here is what I am hearing:

1. Keep going with tax deferred accounts (i.e., 401K)
2. Stop non deductible IRA and put into tax efficient (total stock market index fund) investment fund.
3. Keep my bond allocation in the tax deferred (already doing that).

I just ran the "fire-calc" calculations and I was shocked.. It showed in every instance I grow the portfolio to crazy levels. I hate to ask this, but should I spend more? (i.e., just enjoy it more - 1st class airline Flying V. not etc... ).

Thanks everyone!
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THY4373
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Re: Working on Planning RMDs - Should I stop Contributing

Post by THY4373 »

OP you seem in great financial shape is there any reason you want to continue working until you are 65? You don't seem to need to work that long for the money. If it were me I'd be reassessing how long I wanted to work.
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TomatoTomahto
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Re: Working on Planning RMDs - Should I stop Contributing

Post by TomatoTomahto »

OP, My wife is not yet retired, and with various deferrals, will likely have high income for a number of years after no longer actively working. We have switched her contributions to a Roth 401k for a few years already, but since the employer match is going to deferred, the account grows even though it is mostly in fixed income (of one type or another).

We did do a Roth conversion one year of modest size, but regardless of the ticking tax bomb, it was just too painful to convert at the 42%+ marginal rate. We will likely wish that we had done more in the future, but tight now we are covering our ears and singing “nah nadi nah nah I can’t hear you.”

Good luck.
Last edited by TomatoTomahto on Sun Jun 13, 2021 9:59 am, edited 1 time in total.
I get the FI part but not the RE part of FIRE.
sc9182
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Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

smitcat wrote: Sun Jun 13, 2021 9:36 am
infotrader wrote: Sun Jun 13, 2021 9:05 am You should continue to contribute:
1) Your current tax rate is pretty high, and will have lower tax after retirement.
2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on.
"2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on."
Please describe more about how this is easily delt with later on....
- OP has $2.17 mill in RMD accounts now
- at 58 now, will work to 65
- next 7 years will see more contributions and earnings
- both spouses have strong SS benefits
What are the details to easily deal with this after 65?
This is tax arbitrage and/or more-monies saved issue more~so than a RMD issue.

Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred.

What happens if we have one ore two more COVID type or GFC type crashes with approx 35-55% crash!? My thought is - continue to save more - and build more towards TIPS and or some additional bonds in portfolio to make portfolio more resilient (while still saving 37% taxes now!!). What if inflation goes/stays higher enough for long enough time !? You might have health issues, family/separation etc issues arise or future lousy asset-manager, or under-performing investments, or lousy annuities may happen — don’t be shocked if portfolio shrinks to less than 50% in a hurry due to unknown black swans (is thus being redundant!?)

Even if your future RMD-time tax rate higher than 37% (very hard to imagine unless we are talking $5-6 millions in pre-tax-deferred)., what you have assured is - built more resilience into your portfolio (consider that is the cost of doing bidness).

And if you indeed grown portfolio to ( with good market tail winds) — is it ok to leave some wealth to next generation, or QCD, or leaving legacy to charity — any of such things in mind !?

Never worry about mo-taxes., worry about attaining/saving/growing/maintaining mo- money !!

Having some monies in HSA, Roth, and Taxable would help toward diversification— but you do the math and various life/health/disability/market/inflation/black-Swan scenarios ..
Last edited by sc9182 on Sun Jun 13, 2021 10:29 am, edited 4 times in total.
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retired@50
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Re: Working on Planning RMDs - Should I stop Contributing

Post by retired@50 »

WolfgangPauli wrote: Sun Jun 13, 2021 9:46 am I hate to ask this, but should I spend more? (i.e., just enjoy it more - 1st class airline Flying V. not etc... ).
I'm starting to come around to this point of view as well.

Striking a balance is important, and by the sounds of it, it appears you can spend on things you enjoy without worry. You may need to hold off on the new Aston Martin for another year or two, but visit this link (below) if you want to look at something beautiful that you could "save up for".

Link: https://www.astonmartin.com/en-us/model ... perleggera

Regards,
This is one person's opinion. Nothing more.
lazynovice
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Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

Options include:

Retire earlier
Spend more
Give to charity
Start gifting to heirs while you are alive to see them enjoy it and while they are young enough for it to be meaningful (down payments for homes, college funds for grandkids, etc)
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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WolfgangPauli
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Re: Working on Planning RMDs - Should I stop Contributing

Post by WolfgangPauli »

THY4373 wrote: Sun Jun 13, 2021 9:56 am OP you seem in great financial shape is there any reason you want to continue working until you are 65? You don't seem to need to work that long for the money. If it were me I'd be reassessing how long I wanted to work.
Great question, thank you. Here are my thoughts. First, I do love what I am doing and I love the company really enjoy working with my boss. I just enjoy it.

Second, and this is probably the biggest one, is I am petrified of not being able to get health care. If I am not eligible for medicare and I burn through COBRA where do I go? I understand the "exchanges" but they seem very "wobbly" and at any given time could get changed or eliminated. I just worry a lot about that because even if I have a lot of money, one big health care issue could change everything very quickly.

Interested in your thoughts. Thank you
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Topic Author
WolfgangPauli
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Re: Working on Planning RMDs - Should I stop Contributing

Post by WolfgangPauli »

sc9182 wrote: Sun Jun 13, 2021 9:58 am
smitcat wrote: Sun Jun 13, 2021 9:36 am
infotrader wrote: Sun Jun 13, 2021 9:05 am You should continue to contribute:
1) Your current tax rate is pretty high, and will have lower tax after retirement.
2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on.
"2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on."
Please describe more about how this is easily delt with later on....
- OP has $2.17 mill in RMD accounts now
- at 58 now, will work to 65
- next 7 years will see more contributions and earnings
- both spouses have strong SS benefits
What are the details to easily deal with this after 65?
This is tax arbitrage and/or more-monies saved issue more~so than a RMD issue.

Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred.

What happens if we have one ore two more COVID type or GFC type crashes with approx 35-55% crash!? My thought is - continue to save more - and build more towards TIPS and or some additional bonds in portfolio to make portfolio more resilient (while still saving 37% taxes now!!). What if inflation goes/stays higher enough for long enough time !? You might have health issues, family/separation etc issues arise or future lousy asset-manager, or under-performing investments, or lousy annuities may happen — don’t be shocked if portfolio shrinks to less than 50% in a hurry due to unknown black swans (is thus being redundant!?)

Even if your future RMD-time tax rate higher than 37% (very hard to imagine unless we are talking $5-6 millions in pre-tax-deferred)., what you have assured is - built more resilience into your portfolio (consider that is the cost of doing bidness).

And if you indeed grown portfolio to ( with good market tail winds) — is it ok to leave some wealth to next generation, or QCD, or leaving legacy to charity — any of such things in mind !?

Never worry about mo-taxes., worry about attaining/saving/growing/maintaining mo- money !!

Having some monies in HSA, Roth, and Taxable would help toward diversification— but you do the math and various life/health/disability/market/inflation/black-Swan scenarios ..
I did forget to mention I have about $60K in a HSA and I max that out every year. I am also managing the HSA in such a way as I do not use it now for expenses - I pay in cash. I will use the full HSA when I retire. I am also keeping receipts (up to about $10K) which I will file for as soon as I retire.
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WolfgangPauli
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Re: Working on Planning RMDs - Should I stop Contributing

Post by WolfgangPauli »

lazynovice wrote: Sun Jun 13, 2021 10:00 am Options include:

Retire earlier
Spend more
Give to charity
Start gifting to heirs while you are alive to see them enjoy it and while they are young enough for it to be meaningful (down payments for homes, college funds for grandkids, etc)
Great ponts. I have:

1. Opened a DAF and contributed to that
2. Have filed "gift tax returns" two years in a row and am doing that.

The first two I need to think about / work on.
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retired@50
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Re: Working on Planning RMDs - Should I stop Contributing

Post by retired@50 »

WolfgangPauli wrote: Sun Jun 13, 2021 10:29 am Second, and this is probably the biggest one, is I am petrified of not being able to get health care. If I am not eligible for medicare and I burn through COBRA where do I go? I understand the "exchanges" but they seem very "wobbly" and at any given time could get changed or eliminated. I just worry a lot about that because even if I have a lot of money, one big health care issue could change everything very quickly.
I've been using an ACA policy since the program began in 2014, enrollment in the fall of 2013. In spite of all the early political back and forth, they don't seem wobbly to me, and since you cannot be denied coverage, there is no risk of not having coverage. Depending on your state, there may even be additional protections. Given the fact that there are millions of Americans getting coverage this way, yanking the rug out now isn't likely from a political point of view.

If you're interested, start your healthcare search at https://www.healthcare.gov/

Regards,
This is one person's opinion. Nothing more.
lazynovice
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Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

WolfgangPauli wrote: Sun Jun 13, 2021 10:29 am
THY4373 wrote: Sun Jun 13, 2021 9:56 am OP you seem in great financial shape is there any reason you want to continue working until you are 65? You don't seem to need to work that long for the money. If it were me I'd be reassessing how long I wanted to work.
Great question, thank you. Here are my thoughts. First, I do love what I am doing and I love the company really enjoy working with my boss. I just enjoy it.

Second, and this is probably the biggest one, is I am petrified of not being able to get health care. If I am not eligible for medicare and I burn through COBRA where do I go? I understand the "exchanges" but they seem very "wobbly" and at any given time could get changed or eliminated. I just worry a lot about that because even if I have a lot of money, one big health care issue could change everything very quickly.

Interested in your thoughts. Thank you
The SCOTUS decision coming this month should be telling as far as the future of the exchanges. If the ACA holds, I expect they will be here to stay as they have become very popular with the majority of Americans, especially with the enhanced subsidies. If it does not hold, COBRA is good for at least 18 months so unless your wife is younger than you, you could dial back at 63 1/2.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
THY4373
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Re: Working on Planning RMDs - Should I stop Contributing

Post by THY4373 »

WolfgangPauli wrote: Sun Jun 13, 2021 10:29 am Great question, thank you. Here are my thoughts. First, I do love what I am doing and I love the company really enjoy working with my boss. I just enjoy it.

Second, and this is probably the biggest one, is I am petrified of not being able to get health care. If I am not eligible for medicare and I burn through COBRA where do I go? I understand the "exchanges" but they seem very "wobbly" and at any given time could get changed or eliminated. I just worry a lot about that because even if I have a lot of money, one big health care issue could change everything very quickly.

Interested in your thoughts. Thank you
If you enjoy your job that makes a major difference. My father despite double retiree health care coverage and double inflation linked pensions (from UN and Federal Government) worked until he was in his early 80s because "work was his hobby" and it really was and though he was paid he really wasn't doing it for the money. As far as ACA goes I think at this point it is getting fairly close to a done deal but you are right the risk is not zero by any means and it certainly isn't the cheapest program in the world. That said I would explore it some if I were you because it could certainly be an option. Personally I am 51 and when I reach 55 I'll be able to get retiree health benefits until Medicare but if that doesn't happen then I'll personally take the leap and go onto ACA most likely. I am not nearly so into my job as your are I admit.

I would suggest you give some thought to truly if working to 65 is for you (it may very well be) but basically each additional day you work you are giving up what is probably one of your best days left on earth (none of us are getting younger). I suggest you read the book Die With Zero by Bill Perkins and mess around with the Rich Broke or Dead calculator: https://engaging-data.com/will-money-last-retire-early/ . If you do decide you truly enjoy working then I'd look at increasing your spending, maybe reduce hours and start to do things outside of work you have been putting off. As my grandmother used to tell me "a shroud has no pockets."
LittleMaggieMae
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Re: Working on Planning RMDs - Should I stop Contributing

Post by LittleMaggieMae »

Now's a good time to start thinking about what you enjoy doing outside of work (I know you said you REALLY enjoy working), but what other things do you enjoy? Are you missing out on doing things with non-work people (your family, your friends)? Do you have friends? OK, if you are an extrovert can easily join a group of people doing something without any introductions then maybe you don't need close friends.

Can you look into the ACA exchanges to see how much you would spend? Do you have some other type of healthcare available to you (outside the ACA) that you can purchase (you have a big yearly income - I have heard about "private" insurance groups or doctors who provide care and I think they cater to the well above median household income earners - some friends who have "retired" early have hinted this is how they get their healthcare (I haven't actually asked them about it.)

Do you have any hobbies? Maybe now is a good time to start cultivating some. They require time and sometimes money and they typically aren't something you just jump into and do and then you are done... they are journeys. Sometimes you try a hobby and realize it's not for you... so you have to start over and try something else new. Doing something new in your early 60's is VERY different than doing something new as you approach 70. (at least that is what I'm seeing with a relative.)

If you have reached Financial Independence - does that change how you feel about the fun (of doing the familiar) you are having at work?

I mention all of these - cause I'm watching a relative struggle - they "loved" their job (and maybe assumed they had to work til FRA) and worked until their retirement age 65 - but their job consumed 12 hours per day (commute + office time) which left only the weekends (after tending the house and recovering from the work week) so they didn't cultivate many friendships outside of the things they did that were work related. Their "mid life" weekend hobbies didn't translate very well into things they could do during the week in retirement.

When they did start the retirement process (at 64) they realized they could have stopped working at 62 or even 60. I think they regret not knowing this sooner (as in they didn't pay enough attention to what have a Big Pile O' Money, pensions, and SS actually meant for their retirement). If they had retired earlier - They feel they would have spent more time doing things - like cultivating friendships, time with their adult kids, cultivating hobbies while they had more energy in their early 60's. Now that they are 70 - and feeling "old" it's harder to take up something new or find "friends".
Also, they have more yearly income/long term money than they know what to do with. They are gifting money to their kids at this point. And setting up their retirement accounts to best benefit their heirs. And they still have left over "money". :(

On the plus side now that they have grandchildren (they had kids late in life and now their 30 something kids are having kids) they are making the effort to see and be around and their grandkids.

Just something to think about. ( I know my relative's experience has changed how I am approaching retirement (I was in 50 when my relative started their retirement journey).
Last edited by LittleMaggieMae on Sun Jun 13, 2021 11:03 am, edited 3 times in total.
smitcat
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Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Sun Jun 13, 2021 9:58 am
smitcat wrote: Sun Jun 13, 2021 9:36 am
infotrader wrote: Sun Jun 13, 2021 9:05 am You should continue to contribute:
1) Your current tax rate is pretty high, and will have lower tax after retirement.
2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on.
"2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on."
Please describe more about how this is easily delt with later on....
- OP has $2.17 mill in RMD accounts now
- at 58 now, will work to 65
- next 7 years will see more contributions and earnings
- both spouses have strong SS benefits
What are the details to easily deal with this after 65?
This is tax arbitrage and/or more-monies saved issue more~so than a RMD issue.

Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred.

What happens if we have one ore two more COVID type or GFC type crashes with approx 35-55% crash!? My thought is - continue to save more - and build more towards TIPS and or some additional bonds in portfolio to make portfolio more resilient (while still saving 37% taxes now!!). What if inflation goes/stays higher enough for long enough time !? You might have health issues, family/separation etc issues arise or future lousy asset-manager, or under-performing investments, or lousy annuities may happen — don’t be shocked if portfolio shrinks to less than 50% in a hurry due to unknown black swans (is thus being redundant!?)

Even if your future RMD-time tax rate higher than 37% (very hard to imagine unless we are talking $5-6 millions in pre-tax-deferred)., what you have assured is - built more resilience into your portfolio (consider that is the cost of doing bidness).

And if you indeed grown portfolio to ( with good market tail winds) — is it ok to leave some wealth to next generation, or QCD, or leaving legacy to charity — any of such things in mind !?

Never worry about mo-taxes., worry about attaining/saving/growing/maintaining mo- money !!

Having some monies in HSA, Roth, and Taxable would help toward diversification— but you do the math and various life/health/disability/market/inflation/black-Swan scenarios ..
"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
sc9182
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Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

smitcat wrote: Sun Jun 13, 2021 11:00 am
"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)

Does possibly higher SS for lower benefit Spouse comes to mind!? Any dependents now or in Future !? Or single spousal re-marriage possibility!?

OP concerned they may be one serious Medical issue away from big financial risk - without good insurance (employer provided group) or Medicare. Doesn’t appear to believe the stability/wobbliness of ACA. So what other choice there - than continue to work (for insurance), and continue to save 37% guaranteed Pre-Tax-Deferred !?
smitcat
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Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Sun Jun 13, 2021 11:14 am
smitcat wrote: Sun Jun 13, 2021 11:00 am
"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)

Does possibly higher SS for lower benefit Spouse comes to mind!? Any dependents now or in Future !? Or single spousal re-marriage possibility!?

OP concerned they may be one serious Medical issue away from big financial risk - without good insurance (employer provided group) or Medicare. Doesn’t appear to believe the stability/wobbliness of ACA. So what other choice there - than continue to work (for insurance), and continue to save 37% guaranteed Pre-Tax-Deferred !?
I do not see any math, please describe how you control the RMD's after they start throughout the life of the sheltered accounts?
- they could easily have $90K SS each year
- easily throwing off another $50-100K in after tax accounts each year
- RMD % grows each year
- at some point one spouse passes away
We have run scenarios similar to these through RPM and Pralana - original question remains:
How is this easily handled when RMD's start?
tibbitts
Posts: 14281
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Re: Working on Planning RMDs - Should I stop Contributing

Post by tibbitts »

smitcat wrote: Sun Jun 13, 2021 9:36 am
infotrader wrote: Sun Jun 13, 2021 9:05 am You should continue to contribute:
1) Your current tax rate is pretty high, and will have lower tax after retirement.
2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on.
"2) Your tax deferred account balance is relatively low, and it is pretty easy to deal with later on."
Please describe more about how this is easily delt with later on....
- OP has $2.17 mill in RMD accounts now
- at 58 now, will work to 65
- next 7 years will see more contributions and earnings
- both spouses have strong SS benefits
What are the details to easily deal with this after 65?
By itself the OP's deferred balance doesn't seem out of hand to me. But in at least the original post (I didn't read the entire thread) it's completely out of context: $2M in deferred plus $300k "other" taxable annual income in retirement is much different than $2M in deferred plus $100k "other" taxable income. I'm also assuming that the OP pays state income tax (just based on percentages - most states have income tax) but don't know if those are included.
sc9182
Posts: 587
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Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

smitcat wrote: Sun Jun 13, 2021 11:56 am
sc9182 wrote: Sun Jun 13, 2021 11:14 am
smitcat wrote: Sun Jun 13, 2021 11:00 am
"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)

Does possibly higher SS for lower benefit Spouse comes to mind!? Any dependents now or in Future !? Or single spousal re-marriage possibility!?

OP concerned they may be one serious Medical issue away from big financial risk - without good insurance (employer provided group) or Medicare. Doesn’t appear to believe the stability/wobbliness of ACA. So what other choice there - than continue to work (for insurance), and continue to save 37% guaranteed Pre-Tax-Deferred !?
I do not see any math, please describe how you control the RMD's after they start throughout the life of the sheltered accounts?
- they could easily have $90K SS each year
- easily throwing off another $50-100K in after tax accounts each year
- RMD % grows each year
- at some point one spouse passes away
We have run scenarios similar to these through RPM and Pralana - original question remains:
How is this easily handled when RMD's start?
I think your point is hung up on RMDs - I say fear not.

One other poster mentioned — Roth convert, Possible early retire, gift to kids/other while working still, continue build HSA, and/or contribute to Roth or MBR (in addition to Pre-Tax-deferred)

Can you answer any of “not-so-rosy” possibilities (and life and market outcomes) and how you handle/account for those (I mentioned in earlier post) !? How/whether life insurance plays role, effective tax rate etc !?

As for higher income/RMD in retirement— it’s a good problem to have !! By the time RMDs kick in - one’s standard deduction and/or itemized deductions also would rise !!

If one tries to optimize based on RMDs alone - afraid they are potentially setting up for failure of portfolio effectiveness/stability/longevity !! Yes - you want to tax optimize, but not at the cost of portfolio yielding reduced retirement/RMD income, and reduced resiliency/longevity of your portfolio :-(
smitcat
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Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Sun Jun 13, 2021 12:48 pm
smitcat wrote: Sun Jun 13, 2021 11:56 am
sc9182 wrote: Sun Jun 13, 2021 11:14 am
smitcat wrote: Sun Jun 13, 2021 11:00 am
"Again - at RMD time what would be your ‘then’ tax rate(s) — would it be as high or higher than 37% !? You already saving 37% in current pre-tax-deferred>"
- Would your thoughts be that both spouses live to a similar old age
- They also have 'quite enough' in after tax accounts according to the OP post
- no mention of heirs but the ability to leave funds to them with tax considerations are also a challenge
What are guarantees that OP or spouse May live longer or shorter — at the time or before RMDs comes into picture !?

Do you (and spouse) have life insurance (most likely not - but wealthy folks give a thought to life insurance as Tax/Inheritance/estate planning rather than merely for its death benefit). Note that Life Insurance proceeds are almost-always tax-free so your “effective” tax rate actually goes down significantly!! (A million insurance tax free, but 2 million in tax-deferred at higher 42% rate .. still effective rate of 28% — know this is simplistic math .. but you get the lower effective-tax-rate..)

Does possibly higher SS for lower benefit Spouse comes to mind!? Any dependents now or in Future !? Or single spousal re-marriage possibility!?

OP concerned they may be one serious Medical issue away from big financial risk - without good insurance (employer provided group) or Medicare. Doesn’t appear to believe the stability/wobbliness of ACA. So what other choice there - than continue to work (for insurance), and continue to save 37% guaranteed Pre-Tax-Deferred !?
I do not see any math, please describe how you control the RMD's after they start throughout the life of the sheltered accounts?
- they could easily have $90K SS each year
- easily throwing off another $50-100K in after tax accounts each year
- RMD % grows each year
- at some point one spouse passes away
We have run scenarios similar to these through RPM and Pralana - original question remains:
How is this easily handled when RMD's start?
I think your point is hung up on RMDs - I say fear not.

One other poster mentioned — Roth convert, Possible early retire, gift to kids/other while working still, continue build HSA, and/or contribute to Roth or MBR (in addition to Pre-Tax-deferred)

Can you answer any of “not-so-rosy” possibilities (and life and market outcomes) and how you handle/account for those (I mentioned in earlier post) !? How/whether life insurance plays role, effective tax rate etc !?

As for higher income/RMD in retirement— it’s a good problem to have !! By the time RMDs kick in - one’s standard deduction and/or itemized deductions also would rise !!

If one tries to optimize based on RMDs alone - afraid they are potentially setting up for failure of portfolio effectiveness/stability/longevity !! Yes - you want to tax optimize, but not at the cost of portfolio yielding reduced retirement/RMD income, and reduced resiliency/longevity of your portfolio :-(

"I think your point is hung up on RMDs - I say fear not."
There are a number of articles on dealing with RMD's , here is one of them...
https://www.kitces.com/blog/minimize-de ... ligations/

"As for higher income/RMD in retirement— it’s a good problem to have !! By the time RMDs kick in - one’s standard deduction and/or itemized deductions also would rise !!"
Please link an article or some hard examples of how this could work with these larger derferred accounts.

"Can you answer any of “not-so-rosy” possibilities (and life and market outcomes) and how you handle/account for those (I mentioned in earlier post) !? How/whether life insurance plays role, effective tax rate etc !?"
Please link an article on how you can utilize life insurance for deferred accounts?
sc9182
Posts: 587
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Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

smitcat wrote: Mon Jun 14, 2021 6:58 am ..
"I think your point is hung up on RMDs - I say fear not."
There are a number of articles on dealing with RMD's , here is one of them...
https://www.kitces.com/blog/minimize-de ... ligations/

"As for higher income/RMD in retirement— it’s a good problem to have !! By the time RMDs kick in - one’s standard deduction and/or itemized deductions also would rise !!"
Please link an article or some hard examples of how this could work with these larger derferred accounts.

"Can you answer any of “not-so-rosy” possibilities (and life and market outcomes) and how you handle/account for those (I mentioned in earlier post) !? How/whether life insurance plays role, effective tax rate etc !?"
Please link an article on how you can utilize life insurance for deferred accounts?
"As for higher income/RMD in retirement— it’s a good problem to have !! By the time RMDs kick in - one’s standard deduction and/or itemized deductions also would rise !!."
Ref: https://www.irs.gov/newsroom/irs-provid ... -year-2021

If you are age 65 or older, your standard deduction increases by $1,650 if you file as Single or Head of Household.
If you are Married Filing Jointly and you OR your spouse is 65 or older, your standard deduction increases by $1,300. If BOTH you and your spouse are 65 or older, your standard deduction increases by $2,600.
Ref: https://www.efile.com/tax-deduction/fed ... deduction/


"Please link an article on how you can utilize life insurance for deferred accounts?"
Showed you a potential math earlier about insurance proceeds (tax-free), and how effective rate reduces, earlier. Please RTFM earlier response. BTW - you buy insurance either with Post-tax proceeds, or withdraw from IRA, pay taxes, and use post-tax proceeds to buy life-insurance (you trying to mis-interpret as if you have to buy life insurance within IRA ., and stuck everything in IRA/RMD context - try not)

Then again - your points are totally hung up on RMDs alone - without looking at how to handle/design overall successful plan (also including RMDs)..

You still haven't responded to "Can you answer any of “not-so-rosy” possibilities (and life and market outcomes)" -- which is ok, then again, your points are still stuck on RMDs alone .. as if RMDs 'alone' defines life, markets, and retirement..
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Mon Jun 14, 2021 7:46 am
smitcat wrote: Mon Jun 14, 2021 6:58 am ..
"I think your point is hung up on RMDs - I say fear not."
There are a number of articles on dealing with RMD's , here is one of them...
https://www.kitces.com/blog/minimize-de ... ligations/

"As for higher income/RMD in retirement— it’s a good problem to have !! By the time RMDs kick in - one’s standard deduction and/or itemized deductions also would rise !!"
Please link an article or some hard examples of how this could work with these larger derferred accounts.

"Can you answer any of “not-so-rosy” possibilities (and life and market outcomes) and how you handle/account for those (I mentioned in earlier post) !? How/whether life insurance plays role, effective tax rate etc !?"
Please link an article on how you can utilize life insurance for deferred accounts?
"Please link an article or some hard examples of how this could work with these larger derferred accounts."
Ref: https://www.irs.gov/newsroom/irs-provid ... -year-2021

If you are age 65 or older, your standard deduction increases by $1,650 if you file as Single or Head of Household.
If you are Married Filing Jointly and you OR your spouse is 65 or older, your standard deduction increases by $1,300. If BOTH you and your spouse are 65 or older, your standard deduction increases by $2,600.
Ref: https://www.efile.com/tax-deduction/fed ... deduction/


"Please link an article on how you can utilize life insurance for deferred accounts?"
Showed you a potential math earlier about insurance proceeds (tax-free), and how effective rate reduces, earlier. Please RTFM earlier response. BTW - you buy insurance either with Post-tax proceeds, or withdraw from IRA, pay taxes, and use post-tax proceeds to buy life-insurance (you trying to mis-interpret as if you can buy life insurace within IRA - try not)

Then again - your points are totally hung up on RMDs alone - without looking at how to handle/design overall successful plan (also including RMDs)..

You still haven't responded to ""Can you answer any of “not-so-rosy” possibilities (and life and market outcomes)" -- which is ok, then again, your points are still stuck on RMDs alone .. as if RMDs 'alone' defines life, markets, and retirement..
This topic here is RMD's for future higher draw ....
It appears that you have no strategy or techniques which can deal with higher RMD's after the fact, it would have been nice if you did ...but that was not expected.

"You still haven't responded to ""Can you answer any of “not-so-rosy” possibilities (and life and market outcomes)""
There are plenty of posts on these as well, you can read them on how to utilize calculators to review future potential outcomes.
lazynovice
Posts: 1825
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Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

smitcat wrote: Mon Jun 14, 2021 6:58 am ….
Please link an article on how you can utilize life insurance for deferred accounts?
At the risk of getting in the middle of this… After having read quite a few posts here worried about a spouse moving into the single brackets with large RMDs, I started modeling the impact to us. I found our problem with this would be alleviated in several ways. 1) beginning at age 60, the surviving spouse could begin to draw SS survivor’s benefits and begin investing that cash for future taxes. 2) We have term life insurance in various amounts expiring up until we are 62/64 that can be used to pay the future higher taxes on RMDs, We otherwise don’t need these policies but since we bought them in our 20s - 40s they are pretty cheap. 3) We could identify roughly 20% of expenses that could be reduced, along with selling the extra car and a likely downsizing of the house that would yield extra cash to be invested. 4) The younger we are if one passes away, the more likely it is that the survivor will remarry.

We aren’t really unique in anyway from other Bogleheads except for the absence of any pension income and that we were a dual earner household so our PIAs are not too different. Maybe that we have a house that we are not concerned about leaving if needed.

I have no solution to address the RMDs themselves except for putting your fixed income allocation in those accounts, but the problem of flipping to single rates can be insured against in a few ways.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
smitcat
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Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

lazynovice wrote: Mon Jun 14, 2021 12:27 pm
smitcat wrote: Mon Jun 14, 2021 6:58 am ….
Please link an article on how you can utilize life insurance for deferred accounts?
At the risk of getting in the middle of this… After having read quite a few posts here worried about a spouse moving into the single brackets with large RMDs, I started modeling the impact to us. I found our problem with this would be alleviated in several ways. 1) beginning at age 60, the surviving spouse could begin to draw SS survivor’s benefits and begin investing that cash for future taxes. 2) We have term life insurance in various amounts expiring up until we are 62/64 that can be used to pay the future higher taxes on RMDs, We otherwise don’t need these policies but since we bought them in our 20s - 40s they are pretty cheap. 3) We could identify roughly 20% of expenses that could be reduced, along with selling the extra car and a likely downsizing of the house that would yield extra cash to be invested. 4) The younger we are if one passes away, the more likely it is that the survivor will remarry.

We aren’t really unique in anyway from other Bogleheads except for the absence of any pension income and that we were a dual earner household so our PIAs are not too different. Maybe that we have a house that we are not concerned about leaving if needed.

I have no solution to address the RMDs themselves except for putting your fixed income allocation in those accounts, but the problem of flipping to single rates can be insured against in a few ways.
I agree that the earlier you start the more impact you can have on coming up with the most optimum plan. Waiting untill larger RMD's occurr would leave the least optimum potential plans.
We have run many potential future scenarios with varied potential inputs - SS elections, market performance, age of demise of each spouse, Roth conversions, tax rate of heirs to name a few.
In our case with our numbers we found Roth conversions were the best plan and the results could be summarized like this:
- in a minority of the cases (less likely) the Roth conversions could yield a negative result
- in those minority cases the difference in spendable dollars (after tax) was minimal from baseline (no Roth converts)
- in a majority of the cases (more likely) the Roth conversions yeilded a positive result
- in those majority of cases the difference in spendable dollars was significant from baseline

If we had built up our tax deferred dollars more, or waited untill there were less years for reasonable Roth conversions, or had equities in our tax deferred accounts our ability to optimize any plan would have been extremely limited.
Summary - run the scenarios early and do not wait untill it is too late to make your best plans.
-
wetgear
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Re: Working on Planning RMDs - Should I stop Contributing

Post by wetgear »

WolfgangPauli wrote: Sun Jun 13, 2021 10:32 am I did forget to mention I have about $60K in a HSA and I max that out every year. I am also managing the HSA in such a way as I do not use it now for expenses - I pay in cash. I will use the full HSA when I retire. I am also keeping receipts (up to about $10K) which I will file for as soon as I retire.
Why file as soon as you retire? Unless you need the money let it set there and grow tax free. You can't get HSA space back once you've spent it but you can use your receipts to withdraw tax free at any time so rushing it is shooting yourself in the foot.
VanGar+Goyle
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Re: Working on Planning RMDs - Should I stop Contributing

Post by VanGar+Goyle »

Total in "RMD" type investments: $2,168,511
2020 Marginal Tax Rate: 37%
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Well, you pay a little bit, we're a little bit tough. | You pay very much,very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
lazynovice
Posts: 1825
Joined: Mon Apr 16, 2012 10:48 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Total in "RMD" type investments: $2,168,511
2020 Marginal Tax Rate: 37%
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
smitcat
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Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

lazynovice wrote: Mon Jun 14, 2021 8:04 pm
VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Total in "RMD" type investments: $2,168,511
2020 Marginal Tax Rate: 37%
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
User avatar
Wiggums
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Re: Working on Planning RMDs - Should I stop Contributing

Post by Wiggums »

lazynovice wrote: Sun Jun 13, 2021 10:00 am Options include:

Retire earlier
Spend more
Give to charity
Start gifting to heirs while you are alive to see them enjoy it…
This is what we are doing. Failing miserably at add pending more.
lazynovice
Posts: 1825
Joined: Mon Apr 16, 2012 10:48 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm
VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Total in "RMD" type investments: $2,168,511
2020 Marginal Tax Rate: 37%
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
sc9182
Posts: 587
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Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm
VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Total in "RMD" type investments: $2,168,511
2020 Marginal Tax Rate: 37%
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
Emptying tax/deferred in-all - is wrong advise or wrong solution to large tax-deferred portfolio issue (for the most including many upper echelon of BHs). Mitigate along the way till age 72, retire early , Roth convert (don’t fester it longer by chose to do nothing!), life-insurance to mitigate overall effective tax rate, use it as building generational wealth/inheritance, QCDs, if all else fails — pray for the market to crash — so your RMDs (and Dividends likely cut too) will be half as much. And If markets go crazy high — then plan on donation a million or two at your alma-mater toward “Smitcat Chaired Professorship” for a designated purpose etc. your heirs may get ample admissions/scholarships at that Univ :-) (your generational college fund :-)

Show us the money - there are ways to make good use of it!

Like lazynovice pointed it - mitigate problems along the way - rather than avoid using 37% tax-deferred space currently !!

Worse yet - someone is one (or two) gray-divorces and/or re-marriages away from cutting RMD/portfolio to less than 50% .. we are not even talking bad-market returns/lull.
Last edited by sc9182 on Tue Jun 15, 2021 11:02 am, edited 1 time in total.
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

lazynovice wrote: Tue Jun 15, 2021 9:20 am
smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm
VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Total in "RMD" type investments: $2,168,511
2020 Marginal Tax Rate: 37%
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
sc9182
Posts: 587
Joined: Wed Aug 17, 2016 7:43 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

smitcat wrote: Tue Jun 15, 2021 11:01 am
lazynovice wrote: Tue Jun 15, 2021 9:20 am
smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm
VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
These are corner cases to use the same RMD-scare tactic !! Doesn’t take rocket science to say: Majority of single/widowed retired population doesn’t particularly concentrate in neither CA, nor NY.

“ After divorce and widowhood, many older adults say “I do (remarry)” again at some point in their life.”
Ref: https://www.census.gov/library/stories/ ... dults.html

Nor - anyone forcing you to live in either of those states., instead you can tax-Geo-arbitrate to elsewhere .. easier said than done - but retirees tend to relocate as a choice to address various issues (including taxation)..
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Tue Jun 15, 2021 10:28 am
smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm
VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Total in "RMD" type investments: $2,168,511
2020 Marginal Tax Rate: 37%
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
Emptying tax/deferred in-all - is wrong advise or wrong solution to large tax-deferred portfolio. Mitigate along the way till age 72, retire early , Roth convert (don’t fester it longer by chose to do nothing!), life-insurance to mitigate overall effective tax rate, use it as building generational wealth/inheritance, QCDs, if all else fails — pray for the market to crash — so your RMDs (and Dividends likely cut too) will be half as much. And If markets go crazy high — then plan on donation a million or two at your alma-mater toward “Smitcat Chaired Professorship” for a designated purpose etc. your heirs may get ample admissions/scholarships at that Univ :-) (your generational college fund :-)

Show us the money - there are ways to make good use of it!

Like lazynovice pointed it - mitigate problems along the way - rather than avoid using 37% tax-deferred space currently !!

Worse yet - someone is one (or two) gray-divorces and/or re-marriages away from cutting RMD/portfolio to less than 50% .. we are not even talking bad-market returns/lull.
"retire early , Roth convert (don’t fester it longer by chose to do nothing!)"
Agreed - but this is not "doing nothing untill RMD time" as the orginal problem was stated

"life-insurance to mitigate overall effective tax rate,"
Again ...please reference any reasonably detailed articles on the math and mechiancs of how this could/would work.

"use it as building generational wealth/inheritance, QCDs, if all else fails"
Same here - what good detailed articles descibe how this works to stay under the future marginal rates.

"then plan on donation a million or two at your alma-mater toward “Smitcat Chaired Professorship” for a designated purpose etc. your heirs may get ample admissions/scholarships at that Univ :-) (your generational college fund :-)"
Yes - you can always give it away as one alternative. That is not really the topic for potential solutions here.

"Like lazynovice pointed it - mitigate problems along the way - rather than avoid using 37% tax-deferred space currently !!"
The PO's situation as example per original question - is he able to mitigate it along the way?
You do not have the details to know but he/she is getting very close to running out of planning room based upon my read so far.
- he can retire early , does not plan to
- he can Roth convert, he plans to make that option very limited
- he can limit after tax incomes, likely not a good long term play
- he can divert to Roth or after tax accounts, no plan there either
- all pretax to fixed income, maybe a help if he wants to limit growth there
He/she has time now to assess and optimize - saying dont worry about it till RMD time will provide a poor solution.
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Tue Jun 15, 2021 11:12 am
smitcat wrote: Tue Jun 15, 2021 11:01 am
lazynovice wrote: Tue Jun 15, 2021 9:20 am
smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm

Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
These are corner cases to use the same RMD-scare tactic !! Doesn’t take rocket science to say: Majority of single/widowed retired population doesn’t particularly concentrate in neither CA, nor NY.

“ After divorce and widowhood, many older adults say “I do (remarry)” again at some point in their life.”
Ref: https://www.census.gov/library/stories/ ... dults.html

Nor - anyone forcing you to live in either of those states., instead you can tax-Geo-arbitrate to elsewhere .. easier said than done - but retirees tend to relocate as a choice to address various issues (including taxation)..
Sure - moving for someone at that stage and age is always very cheap and fun.
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Tue Jun 15, 2021 11:12 am
smitcat wrote: Tue Jun 15, 2021 11:01 am
lazynovice wrote: Tue Jun 15, 2021 9:20 am
smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm

Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
These are corner cases to use the same RMD-scare tactic !! Doesn’t take rocket science to say: Majority of single/widowed retired population doesn’t particularly concentrate in neither CA, nor NY.

“ After divorce and widowhood, many older adults say “I do (remarry)” again at some point in their life.”
Ref: https://www.census.gov/library/stories/ ... dults.html

Nor - anyone forcing you to live in either of those states., instead you can tax-Geo-arbitrate to elsewhere .. easier said than done - but retirees tend to relocate as a choice to address various issues (including taxation)..
Have you run these types of numbers through any of the typical calulators to see the results?
- extended IORP
- RPM
- Pralana
sc9182
Posts: 587
Joined: Wed Aug 17, 2016 7:43 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

smitcat wrote: Tue Jun 15, 2021 11:17 am
sc9182 wrote: Tue Jun 15, 2021 11:12 am
smitcat wrote: Tue Jun 15, 2021 11:01 am
lazynovice wrote: Tue Jun 15, 2021 9:20 am
smitcat wrote: Tue Jun 15, 2021 8:26 am

At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
These are corner cases to use the same RMD-scare tactic !! Doesn’t take rocket science to say: Majority of single/widowed retired population doesn’t particularly concentrate in neither CA, nor NY.

“ After divorce and widowhood, many older adults say “I do (remarry)” again at some point in their life.”
Ref: https://www.census.gov/library/stories/ ... dults.html

Nor - anyone forcing you to live in either of those states., instead you can tax-Geo-arbitrate to elsewhere .. easier said than done - but retirees tend to relocate as a choice to address various issues (including taxation)..
Have you run these types of numbers through any of the typical calulators to see the results?
- extended IORP
- RPM
- Pralana
Yes to some - no to some other tools.
Any of those tools showed you how to effectively use Life Insurance to mitigate taxation/estate-tax scenarios ? Use tooling (or their ever improving feature-set) to model financial numbers and taxation., but don't let those define/control/handle all sorts of things life throws at you !
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

sc9182 wrote: Tue Jun 15, 2021 11:26 am
smitcat wrote: Tue Jun 15, 2021 11:17 am
sc9182 wrote: Tue Jun 15, 2021 11:12 am
smitcat wrote: Tue Jun 15, 2021 11:01 am
lazynovice wrote: Tue Jun 15, 2021 9:20 am

I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
These are corner cases to use the same RMD-scare tactic !! Doesn’t take rocket science to say: Majority of single/widowed retired population doesn’t particularly concentrate in neither CA, nor NY.

“ After divorce and widowhood, many older adults say “I do (remarry)” again at some point in their life.”
Ref: https://www.census.gov/library/stories/ ... dults.html

Nor - anyone forcing you to live in either of those states., instead you can tax-Geo-arbitrate to elsewhere .. easier said than done - but retirees tend to relocate as a choice to address various issues (including taxation)..
Have you run these types of numbers through any of the typical calulators to see the results?
- extended IORP
- RPM
- Pralana
Yes to some - no to some other tools.
Any of those tools showed you how to effectively use Life Insurance to mitigate taxation/estate-tax scenarios ? Use tooling (or their ever improving feature-set) to model financial numbers and taxation., but don't let those define/control/handle all sorts of things life throws at you !
Once again... please provide a link to any reasonably detailed article(s) showing the math and process to use life insurance for these purposes.

What numbers and parameters have you loaded into these tools that allows a situation where you do not need to worry about RMD's until they are due? At least these inputs:
- ages at retire and SS election
- SS for spouses
- totals in pretax, ROTH, and tax deferred
- AA and market performance
- state of residence
Which tool were these applied to?
lazynovice
Posts: 1825
Joined: Mon Apr 16, 2012 10:48 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

smitcat wrote: Tue Jun 15, 2021 11:01 am
lazynovice wrote: Tue Jun 15, 2021 9:20 am
smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm
VanGar+Goyle wrote: Mon Jun 14, 2021 7:50 pm
Did we ever estimate what they would pay in marginal tax rate after retiring in 7 years at 65, or 14 years at 72, with no changes?

The pre-tax total may almost double to $4M, so RMDs could be around $160K, plus other income,
and could drop 4 tax brackets to 22% ( 25% TCJA ) Married Filing Jointly + IRMAA.
Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
I am speaking about federal only and using 37% when I should say “top bracket.” Someone making 600k in California is paying 37% federal and 11% state.

In your example- the taxable ordinary income in retirement is 231k (175k+ 85% of 80 SS + 15% of 80k for non qualified dividends) less than standard deduction and capital gains income is 68k (85% of 80K for qualified dividends). That is the 24% bracket for federal and 9.3% for California

Do you advise that person to stop deferring at a 48% today to avoid a future 33%?

One spouse dies? Cut the SS in half, decrease the standard deduction and now you are in the 32% and 9.3% bracket. So the married couple should stop deferring at 48% to avoid paying 41.3%? I am not even taking into account that California exempts 100% of social security from taxation.

I am not saying RMDs are not an issue. I am saying that if you are in the top tax bracket during your working years, you should almost always be deferring because the odds are extremely in your favor that your tax rate will go down even with RMDs.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

lazynovice wrote: Tue Jun 15, 2021 11:35 am
smitcat wrote: Tue Jun 15, 2021 11:01 am
lazynovice wrote: Tue Jun 15, 2021 9:20 am
smitcat wrote: Tue Jun 15, 2021 8:26 am
lazynovice wrote: Mon Jun 14, 2021 8:04 pm

Very few retirees are going to end up in the 37% bracket due to RMDs. You’d need a massive deferred account, pensions, SS and maybe a young spouse who works in a high paying job when the older spouse is retired. A few of those people here but not many.
At 70...
$175K first year - if left untouhed $4 million in tax defferred
$ 80K+ SS - if taken at 70
$ 80K+ Divs and cap gains - if account has funds like OP seems to have indicated

$335K+ first year guess for state and local taxes.
Questions:
- what state does the OP/example person live in?
- what happens as the deferred account continues to grow?
- what happens to RMD %'s as the account holder(s) age?
- what happens when one spouse passes?
- what is the tax rate of heirs?
Eventually you need to remove all of the funds from the deferred account. Often the longer you wait the worse the problem becomes and the less ability to optimize it. Action item - do not look at this as a problem that may occurr at age 70 but more as a problem to be solved in its entirety.
I think we agree that a long term solution is needed.

My point is that rarely is the answer to stop deferring when you are in the 37% tax bracket. Even at single rates, the top bracket starts at $500k. And that will be adjusted for inflation. In this case, you’ll drop one of those SS upon death of first spouse and if invested in index funds- 85-95% of those dividends will be qualified and only 85% of SS is taxed. Very unlikely you’ll end up in the 37% under current law.

Roth conversions, insurance, etc can be used to solve some of these problems but I can’t see a way to justify paying 37% today to avoid 24% tomorrow.
What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
I am speaking about federal only and using 37% when I should say “top bracket.” Someone making 600k in California is paying 37% federal and 11% state.

In your example- the taxable ordinary income in retirement is 231k (175k+ 85% of 80 SS + 15% of 80k for non qualified dividends) less than standard deduction and capital gains income is 68k (85% of 80K for qualified dividends). That is the 24% bracket for federal and 9.3% for California

Do you advise that person to stop deferring at a 48% today to avoid a future 33%?

One spouse dies? Cut the SS in half, decrease the standard deduction and now you are in the 32% and 9.3% bracket. So the married couple should stop deferring at 48% to avoid paying 41.3%? I am not even taking into account that California exempts 100% of social security from taxation.

I am not saying RMDs are not an issue. I am saying that if you are in the top tax bracket during your working years, you should almost always be deferring because the odds are extremely in your favor that your tax rate will go down even with RMDs.
"I am speaking about federal only and using 37% when I should say “top bracket.” Someone making 600k in California is paying 37% federal and 11% state."
Where did you get that the OP was only looking at federal taxes and not total taxes paid?
Did he/she make anothe post in this thread that led us to believe this was a federal tax rate only?
If he/she is only speaking about federal rates then I am using the wrong numbers.
lazynovice
Posts: 1825
Joined: Mon Apr 16, 2012 10:48 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

smitcat wrote: Tue Jun 15, 2021 11:34 am
sc9182 wrote: Tue Jun 15, 2021 11:26 am
smitcat wrote: Tue Jun 15, 2021 11:17 am
sc9182 wrote: Tue Jun 15, 2021 11:12 am
smitcat wrote: Tue Jun 15, 2021 11:01 am

What amount of income do you need to reach a 37% rate in Calif , NY , etc when single?
These are corner cases to use the same RMD-scare tactic !! Doesn’t take rocket science to say: Majority of single/widowed retired population doesn’t particularly concentrate in neither CA, nor NY.

“ After divorce and widowhood, many older adults say “I do (remarry)” again at some point in their life.”
Ref: https://www.census.gov/library/stories/ ... dults.html

Nor - anyone forcing you to live in either of those states., instead you can tax-Geo-arbitrate to elsewhere .. easier said than done - but retirees tend to relocate as a choice to address various issues (including taxation)..
Have you run these types of numbers through any of the typical calulators to see the results?
- extended IORP
- RPM
- Pralana
Yes to some - no to some other tools.
Any of those tools showed you how to effectively use Life Insurance to mitigate taxation/estate-tax scenarios ? Use tooling (or their ever improving feature-set) to model financial numbers and taxation., but don't let those define/control/handle all sorts of things life throws at you !
Once again... please provide a link to any reasonably detailed article(s) showing the math and process to use life insurance for these purposes.

What numbers and parameters have you loaded into these tools that allows a situation where you do not need to worry about RMD's until they are due? At least these inputs:
- ages at retire and SS election
- SS for spouses
- totals in pretax, ROTH, and tax deferred
- AA and market performance
- state of residence
Which tool were these applied to?
In my own situation, currently at 37% federal and 4.6% state (flat tax except first bit of retirement income is exempt). My spouse and I have PIAs within 20% of each other. We are two years apart in age. 66% of portfolio in taxable, 2% in Roth, rest in 401(k). 100% fixed income in 401(K). Will convert to Roth up to 15% federal until 63 to avoid IRMAA but maybe less if ACA subsidies are in reach. If one of us dies before 63, we have $1 million policies of life insurance which will more than cover any increase in taxes by moving to single rates. That insurance costs 2,000 per year between the two of us. After 60, the survivor can draw SS survivor’s benefits. Taxable but on a net basis can alleviate tax burden.

Tell me why I should stop deferring now at top brackets? Why should I convert past 15% when the time comes?
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
smitcat
Posts: 8015
Joined: Mon Nov 07, 2016 10:51 am

Re: Working on Planning RMDs - Should I stop Contributing

Post by smitcat »

lazynovice wrote: Tue Jun 15, 2021 12:17 pm
smitcat wrote: Tue Jun 15, 2021 11:34 am
sc9182 wrote: Tue Jun 15, 2021 11:26 am
smitcat wrote: Tue Jun 15, 2021 11:17 am
sc9182 wrote: Tue Jun 15, 2021 11:12 am
These are corner cases to use the same RMD-scare tactic !! Doesn’t take rocket science to say: Majority of single/widowed retired population doesn’t particularly concentrate in neither CA, nor NY.

“ After divorce and widowhood, many older adults say “I do (remarry)” again at some point in their life.”
Ref: https://www.census.gov/library/stories/ ... dults.html

Nor - anyone forcing you to live in either of those states., instead you can tax-Geo-arbitrate to elsewhere .. easier said than done - but retirees tend to relocate as a choice to address various issues (including taxation)..
Have you run these types of numbers through any of the typical calulators to see the results?
- extended IORP
- RPM
- Pralana
Yes to some - no to some other tools.
Any of those tools showed you how to effectively use Life Insurance to mitigate taxation/estate-tax scenarios ? Use tooling (or their ever improving feature-set) to model financial numbers and taxation., but don't let those define/control/handle all sorts of things life throws at you !
Once again... please provide a link to any reasonably detailed article(s) showing the math and process to use life insurance for these purposes.

What numbers and parameters have you loaded into these tools that allows a situation where you do not need to worry about RMD's until they are due? At least these inputs:
- ages at retire and SS election
- SS for spouses
- totals in pretax, ROTH, and tax deferred
- AA and market performance
- state of residence
Which tool were these applied to?
In my own situation, currently at 37% federal and 4.6% state (flat tax except first bit of retirement income is exempt). My spouse and I have PIAs within 20% of each other. We are two years apart in age. 66% of portfolio in taxable, 2% in Roth, rest in 401(k). 100% fixed income in 401(K). Will convert to Roth up to 15% federal until 63 to avoid IRMAA but maybe less if ACA subsidies are in reach. If one of us dies before 63, we have $1 million policies of life insurance which will more than cover any increase in taxes by moving to single rates. That insurance costs 2,000 per year between the two of us. After 60, the survivor can draw SS survivor’s benefits. Taxable but on a net basis can alleviate tax burden.

Tell me why I should stop deferring now at top brackets? Why should I convert past 15% when the time comes?
"Tell me why I should stop deferring now at top brackets? Why should I convert past 15% when the time comes?"
In your case I would do what you are doing - we are doing the same but are going up to another tax bracket with our Roth conversions.
I cannot begin to tell if your specific numbers warrant much of a change (if any) to the plan but it sounds pretty good from what little you post.

Have you tried running your numbers on RPM or Pralana?
lazynovice
Posts: 1825
Joined: Mon Apr 16, 2012 10:48 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by lazynovice »

smitcat wrote: Tue Jun 15, 2021 2:14 pm
lazynovice wrote: Tue Jun 15, 2021 12:17 pm
smitcat wrote: Tue Jun 15, 2021 11:34 am
sc9182 wrote: Tue Jun 15, 2021 11:26 am
smitcat wrote: Tue Jun 15, 2021 11:17 am

Have you run these types of numbers through any of the typical calulators to see the results?
- extended IORP
- RPM
- Pralana
Yes to some - no to some other tools.
Any of those tools showed you how to effectively use Life Insurance to mitigate taxation/estate-tax scenarios ? Use tooling (or their ever improving feature-set) to model financial numbers and taxation., but don't let those define/control/handle all sorts of things life throws at you !
Once again... please provide a link to any reasonably detailed article(s) showing the math and process to use life insurance for these purposes.

What numbers and parameters have you loaded into these tools that allows a situation where you do not need to worry about RMD's until they are due? At least these inputs:
- ages at retire and SS election
- SS for spouses
- totals in pretax, ROTH, and tax deferred
- AA and market performance
- state of residence
Which tool were these applied to?
In my own situation, currently at 37% federal and 4.6% state (flat tax except first bit of retirement income is exempt). My spouse and I have PIAs within 20% of each other. We are two years apart in age. 66% of portfolio in taxable, 2% in Roth, rest in 401(k). 100% fixed income in 401(K). Will convert to Roth up to 15% federal until 63 to avoid IRMAA but maybe less if ACA subsidies are in reach. If one of us dies before 63, we have $1 million policies of life insurance which will more than cover any increase in taxes by moving to single rates. That insurance costs 2,000 per year between the two of us. After 60, the survivor can draw SS survivor’s benefits. Taxable but on a net basis can alleviate tax burden.

Tell me why I should stop deferring now at top brackets? Why should I convert past 15% when the time comes?
"Tell me why I should stop deferring now at top brackets? Why should I convert past 15% when the time comes?"
In your case I would do what you are doing - we are doing the same but are going up to another tax bracket with our Roth conversions.
I cannot begin to tell if your specific numbers warrant much of a change (if any) to the plan but it sounds pretty good from what little you post.

Have you tried running your numbers on RPM or Pralana?
Not asking for advice. You keep saying that there are many traps with RMDs that would warrant someone discontinuing deferring in the top tax bracket. I am saying they are very rare. You brought up state taxes and I showed you that does not change the answer.

And I gave you an example of where cheap term life insurance and social security survivor’s benefits can be used to mitigate the tax impact of one spouse dying earlier than planned.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
sc9182
Posts: 587
Joined: Wed Aug 17, 2016 7:43 pm

Re: Working on Planning RMDs - Should I stop Contributing

Post by sc9182 »

lazynovice wrote: Tue Jun 15, 2021 7:30 pm
smitcat wrote: Tue Jun 15, 2021 2:14 pm
Have you tried running your numbers on RPM or Pralana?
Not asking for advice. You keep saying that there are many traps with RMDs that would warrant someone discontinuing deferring in the top tax bracket. I am saying they are very rare. You brought up state taxes and I showed you that does not change the answer.

And I gave you an example of where cheap term life insurance and social security survivor’s benefits can be used to mitigate the tax impact of one spouse dying earlier than planned.
Gr8 tips lazynovice !! Thanks for sharing real life example of looking at overall taxation, and tax rate planning.

** following mostly to discuss smitcat RMD/taxation concerns **

Rather than — stuck only within RMD context and try to optimize RMDs for “single/widowed/divorced CA/NY retiree with very huge tax-deferred with highest tax-bracket then with IRMAA” who may have missed multiple RMD optimization and effective tax rate planning windows!! Glad smitcat didn’t yet add rich aunt Debbie’s inheritance and/or inherited non-spousal RMDs to this very specific scenario !!

BTW - promptly failing to mention last year RMDs have been waived, and not too long ago - RMDs have been upped from 70.5 years to 72 years age .. some are already benefiting from these changes - and kicking the can till 72., obviously RMDs are going to be bigger problem at 72 — for not taking any action all the time till age 72 — now RMD poses bigger tax fear !!

While for nearly 40-50 years of working career (and/or retired/early retired years) — allowing tax-preferred accounts to grow and compound for such a long time, enjoying its tax-preferred benefits all along the way — is a good problem to have large RMDs (but don’t plan for it with inaction though :-)

Try postponing pensions, deferred-comps or double-max SS all the way up till age 72 — good luck with that !!

As for large growth - congratulations, markets have been blessing many folks and their accounts over last dozen years — obviously RMDs will be higher. Higher RMDs means you’ve (portfolio) done good — be/hope it continues that way.

On market events like GFC, you are possibly busy doing TLH in brokerage accounts - while balancing asset allocation in Pre-tax and/or some amount of Roth-conversion using Brokerage cash to pay for conversion taxes. And your RMDs and possibly total income could cut down to half as much (or worse). Now - you have a “need mo money” problem than “paying mo taxes” problem (which you solely/mainly attribute to RMDs and single tax filing status in CA/NY). Fear not .. you can geo-tax-arbitrage if living Costs/inflation raises too much higher especially during GFC type events.

But if you had Roth-only in this context — account could have been 37% lesser than pre-tax-deferred (or lesser still), to begin with — then incur 50% or higher GFC crash, now one has “needing mo money” problem than “paying mo taxes” issue .. I hope one don’t have mortgage, loans, not-covered medical-costs, or fixed recurring payments at such time — portfolios may suffer point-of-no-return damage!!

Have monies in 401k - be active employee in non-5% owner company with decent 401k plan - now you can continue to kick the RMD can further down the years beyond 72 (or forever if you continue to be active employee) .. its likely you have good connections you can work limited hours/part-time to maintain active employment status with them - to make this happen - since you’ve been very successful- and that’s how you got here (higher tax bracket and very huge pre-tax) .. just make sure you keep monies Rollover-IRA., instead of co-mingling/polluting with contributory-IRA .. for easy rollover of rollover-IRAs into 401(k).
Last edited by sc9182 on Wed Jun 16, 2021 7:28 am, edited 1 time in total.
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