Avoiding Taxes with RMD

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my name
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Avoiding Taxes with RMD

Post by my name » Wed May 24, 2017 1:08 pm

In 2016 I had a calm tax year, owed no taxes and only used the itemized deductions thanks to some medical costs. I have lived off of money that was already taxed and a small pension, and delay social security until 70.

Now, I am 70 later this year. My RMDs begin next year, as does my first full year of social security where I will receive about the maximum payout that SS gives. Along with cap gains, interest and dividends, and the small pension, I will have high taxes. Also, the SS will be taxed, my Medicare "stuff" will have higher premiums and such.

The RMD will be reinvested. Investments are for any needed long term care.

Are there strategies to avoid the big tax hit for years to come? I won't be giving the RMD to charity while living. I am not interested in any fancy life insurance trust type purchases as there are no "heirs". I can't move enough more to my Roth to make any real difference. I did save all my tons of career wardrobes to give as a charity deduction in my first RMD year.

I don't see much help, any advice is welcome. Are people like me just "stuck" paying taxes now?

delamer
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Re: Avoiding Taxes with RMD

Post by delamer » Wed May 24, 2017 1:30 pm

Two steps to take:

Use the Taxcaster app to estimate your taxes for 2018, including your Social Security and RMD. This will tell you if you'll be pushed into a different bracket based on the new income sources.

If this turns out to be the case, consider taking a withdrawal from your tax-deferred account this year, up to the point where you'd be pushed into the next marginal bracket. That way, you will reduce the amount of your RMD required next year and so reduce overall taxes, even if it raises taxes for this year.

If you are in a state with income taxes, you need to consider those too.

Ideally, you would have been following this strategy for multiple years -- again, assuming that you'll be pushed into a higher tax bracket with the RMD -- but one is better none.

It is not unusual for people to overlook this aspect of delaying SS until 70; that you have a big bump in income since you have to start RMDs at the same time.

EDIT: Just a reminder that unless you income was really low, you were inevitably going to pay tax on your traditional IRA/401(k) withdrawals. You had some control of the rate, but you were going to pay the piper. Better to have higher income and owe more taxes than low income with no taxes.

my name
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Re: Avoiding Taxes with RMD

Post by my name » Wed May 24, 2017 2:02 pm

delamer wrote:but you were going to pay the piper. Better to have higher income and owe more taxes than low income with no taxes.
Thanks. I agree, I recall someone made a zillion dollars on stock like Google and was hesitant to sell some to take some profit because of taxes. It is all relative, I guess.

As you suggest, I will play with a tax app and add in a roth conversion for some relief.

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dodecahedron
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Re: Avoiding Taxes with RMD

Post by dodecahedron » Wed May 24, 2017 2:14 pm

If you are willing to take a part-time job at an employer who will let you roll your traditional retirement plans into their 401k or other defined contribution plan, you can put off RMDs indefinitely as long as you are willing to work there, which gives you more years for gradual conversions to Roth IRA.

Miriam2
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Re: Avoiding Taxes with RMD

Post by Miriam2 » Wed May 24, 2017 2:34 pm

This previous thread "Surviving the Tax Bite of RMD Withdrawals in Retirement" may be helpful

viewtopic.php?f=10&t=156313

JW-Retired
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Re: Avoiding Taxes with RMD

Post by JW-Retired » Thu May 25, 2017 12:45 pm

my name wrote:In 2016 I had a calm tax year, owed no taxes and only used the itemized deductions thanks to some medical costs. I have lived off of money that was already taxed and a small pension, and delay social security until 70.
By "owed no taxes" do you mean you paid zero income tax in 2016? If so, 2016 would have been a great year to do some Roth conversions, so in 2018 when you are taking RMDs and SS your tax hit would be reduced.

What's your tax situation going to be in 2017?
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Re: Avoiding Taxes with RMD

Post by tomd37 » Thu May 25, 2017 1:02 pm

My name,
If you will be itemizing deductions in 2017 don't forget the threshold for itemizing medical deductions rises from 7.5% to 10% starting in tax year 2017. Also, if you are into charitable contributions, once you attain the age of 70.5 (and not a day before) you are eligible for qualified charitable distributions (QCD). The amount of QCDs is not included as taxable income so you will save taxes if you go that route as opposed to using charitable contributions as a itemized deduction. E.g., $10K QCD in the 25% marginal tax bracket saves $2,500 federal taxes.
Tom D.

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Re: Avoiding Taxes with RMD

Post by Alan S. » Thu May 25, 2017 1:45 pm

The optimal time to address this issue is in the years between retirement and the start of SS benefits and also the years between retirement and 70.5. To the extent the above two periods run concurrently, those are the years you can allocate the most dollars to Roth conversions and pay a lower tax rate on those conversion than you would otherwise pay on your RMDs had the pre tax plans not been converted.

Once you reach 70.5, the best opportunities to address your imminent higher tax bracket are considerably limited, although you can still address the situation in a much more limited manner. Prior to reaching 70 is the ideal time to consider moving to a low income tax or no income tax state if you live in a high tax state. Once people reach their late 70s, they are unlikely to make that move.

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Re: Avoiding Taxes with RMD

Post by my name » Thu May 25, 2017 1:48 pm

JW-Retired wrote:
my name wrote:By "owed no taxes" do you mean you paid zero income tax in 2016?
Right, no tax owed. I lived on already taxed money and a small pension. I had maybe 3 years where I might have done some Roth conversions, but the effect is very minimal if you are just trying to reach the border of the next tax rate. Interesting, Roths are relatively new to those my age, and I began funding this once it was available. But the cap kept it from having much effect overall. Younger people can better set up such a strategy.

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Re: Avoiding Taxes with RMD

Post by my name » Thu May 25, 2017 1:57 pm

Alan S. wrote:Prior to reaching 70 is the ideal time to consider moving to a low income tax or no income tax state if you live in a high tax state.
Right. My high tax state of NJ just changed their law to keep seniors. They already did not tax SS. Now seniors will pay no tax on any retirement income as follows - from Forbes article:

"Under current New Jersey law, a couple filing jointly with total income of $100,000 or less can exclude up to $20,000 of retirement income (for a single filer, it’s $15,000). The enhanced tax break will be phased in over four years, so by 2020, a couple filing jointly can exclude up to $100,000 of retirement income and a single filer can exclude $75,000. So the break is more powerful for a single person, a widow, or widower. "

https://www.forbes.com/sites/ashleaebel ... 3500249446

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celia
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Re: Avoiding Taxes with RMD

Post by celia » Thu May 25, 2017 2:34 pm

my name wrote:
JW-Retired wrote:By "owed no taxes" do you mean you paid zero income tax in 2016?
Right, no tax owed. I lived on already taxed money and a small pension. I had maybe 3 years where I might have done some Roth conversions, but the effect is very minimal if you are just trying to reach the border of the next tax rate. Interesting, Roths are relatively new to those my age, and I began funding this once it was available. But the cap kept it from having much effect overall. Younger people can better set up such a strategy.
Just for the benefit of others who may be in a similar situation, you should have estimated your 2016 taxes around December 1 of last year when you saw you had big itemized deductions. You may have been able to take the same amount out of your tax-deferred accounts as the itemized deductions were while paying no/minimal taxes. Then you could play around with the numbers and see if you should take out more or less. After you decide what is optimal for you, you can then take the withdrawal before the year ended.

Note that the taxes would be the same whether you put the withdrawal into a taxable account or into a Roth. So if you didn't need more for living expenses or an Emergency Fund, converting to Roth is a no-brainer. I suggest you convert this year to the top of whatever bracket you will be in next year or one bracket lower.

To help you and others in this situation think about this corrently, you need to remember that this money was to be tax-deferred when you put it into the account. That means the money in the account belongs to you and the IRS and possibly your state. The money was never all "yours" to begin with because you still owed the taxes. Uncle Sam was allowing you to invest your money along with his. If you did well with it, he does too. If you had losses, he does too. But as you withdraw money from the account, he wants his share. Remember, this was never all "yours" to begin with, even though you saw account statements all these years with only your name on it. The government owns part of it but allowed you to delay withdrawals until you were retired. Now that you are about to turn 70.5, they are owed their share. That is what you agreed to when you opened the account.

Did I mention that the money was never all "yours"? :oops:
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Avoiding Taxes with RMD

Post by Alan S. » Thu May 25, 2017 2:40 pm

my name wrote:
Alan S. wrote:Prior to reaching 70 is the ideal time to consider moving to a low income tax or no income tax state if you live in a high tax state.
Right. My high tax state of NJ just changed their law to keep seniors. They already did not tax SS. Now seniors will pay no tax on any retirement income as follows - from Forbes article:

"Under current New Jersey law, a couple filing jointly with total income of $100,000 or less can exclude up to $20,000 of retirement income (for a single filer, it’s $15,000). The enhanced tax break will be phased in over four years, so by 2020, a couple filing jointly can exclude up to $100,000 of retirement income and a single filer can exclude $75,000. So the break is more powerful for a single person, a widow, or widower. "

https://www.forbes.com/sites/ashleaebel ... 3500249446
Looks like David Tepper saved seniors plenty:
https://www.nytimes.com/2016/05/01/busi ... .html?_r=0

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dodecahedron
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Re: Avoiding Taxes with RMD

Post by dodecahedron » Thu May 25, 2017 3:25 pm

my name wrote: Right. My high tax state of NJ just changed their law to keep seniors. They already did not tax SS. Now seniors will pay no tax on any retirement income as follows - from Forbes article:

"Under current New Jersey law, a couple filing jointly with total income of $100,000 or less can exclude up to $20,000 of retirement income (for a single filer, it’s $15,000). The enhanced tax break will be phased in over four years, so by 2020, a couple filing jointly can exclude up to $100,000 of retirement income and a single filer can exclude $75,000. So the break is more powerful for a single person, a widow, or widower. "

https://www.forbes.com/sites/ashleaebel ... 3500249446
Interesting development. However, the article also notes that the $100K limitation is not indexed for inflation and it has notable "cliff" effects (i.e., a couple with $100K in total income can exclude up to $100K in retirement income, but if they get an additional dollar of income--of any kind--they lose the entire exclusion!)

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Re: Avoiding Taxes with RMD

Post by The Wizard » Thu May 25, 2017 4:25 pm

Water over the dam for OP perhaps, but it's better to plan ahead by projecting your annual AGI or Taxable Income for each year from start of retirement to your early 70s at least.
Then "levelize" your AGI by doing Roth conversions each year. Goal for some of us is to have AGI increase maybe 3% or 5% each year prior to age 70 with not "too" big a jump at 70.5 when SS and RMDs start.
That's what I'm doing.

Note: we never know what the market will do as we get closer to age 70. This plan should be flexible...
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invst65
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Re: Avoiding Taxes with RMD

Post by invst65 » Thu May 25, 2017 4:54 pm

Before I even knew what an RMD was I inadvertently did something to reduce mine. I married a woman 17 years younger than me. If your spouse is > 15 years younger than you, the percentage you have to take out is less.

It's a double-edged sword however because now she is still working while I'm retired at 68 and delaying SS until 70. So I'm expecting a big jump into a new tax bracket in a couple of years when SS + RMD begins in the same year with the wife also entering her peak earning years. The only thing I've been able to think of doing to reduce it is maximizing my wife's 401k contributions and arranging the portfolio so that the "safe" assets with less growth potential are in my traditional IRA.

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Re: Avoiding Taxes with RMD

Post by dodecahedron » Thu May 25, 2017 5:03 pm

The Wizard wrote:Water over the dam for OP perhaps, but it's better to plan ahead by projecting your annual AGI or Taxable Income for each year from start of retirement to your early 70s at least.
Then "levelize" your AGI by doing Roth conversions each year. Goal for some of us is to have AGI increase maybe 3% or 5% each year prior to age 70 with not "too" big a jump at 70.5 when SS and RMDs start.
That's what I'm doing.

Note: we never know what the market will do as we get closer to age 70. This plan should be flexible...
Yes, that is a useful rule of thumb but of course nothing is perfect. You have already mentioned that market changes can throw off planning. It would be inappropriate to discuss possible tax law changes due to forum rules but other factors that can throw off planning even if tax laws do not change:

1) one partner dying, potentially changing income streams as well as tax filing status
2) cliff effects which can differ year to year depending on lifestage (keeping AGI low enough to qualify for credits for ACA, education, staying below IRMAA in Medicare years, qualifying for senior property tax breaks, etc.)
3) SS "hump" issues--once you are over the hump in a given year, might be worth converting more
4) inheritances
5) large LTC expenses

So it is very much a guessing game but tax diversification seems to be a useful general goal. At 63, I already have more in Roth than in traditional (and more in my taxable account than the other two combined), so I am going slower on conversions at this point.

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Re: Avoiding Taxes with RMD

Post by BigJohn » Thu May 25, 2017 5:09 pm

The Wizard wrote:Then "levelize" your AGI by doing Roth conversions each year. Goal for some of us is to have AGI increase maybe 3% or 5% each year prior to age 70 with not "too" big a jump at 70.5 when SS and RMDs start.
FWIW, this is my plan for the next 10 years before RMDs and SS both kick-in.

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Re: Avoiding Taxes with RMD

Post by The Wizard » Thu May 25, 2017 6:55 pm

dodecahedron wrote: ...So it is very much a guessing game but tax diversification seems to be a useful general goal. At 63, I already have more in Roth than in traditional (and more in my taxable account than the other two combined), so I am going slower on conversions at this point.
Yes, there are a bunch of other issues to be aware of.
I'm already in a higher Medicare tier, so I want to avoid getting into the next higher one.
Also, I'm in the low end of the 28% federal tax and always will be with the present system. So the old rule about delaying taxes if the rate is the same kicks in.
It comes down to paying the same tax either way with proceeds going to either Roth or Taxable account...
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Re: Avoiding Taxes with RMD

Post by hulburt1 » Thu May 25, 2017 7:16 pm

I just ran all my numbers along with wife. When she hits 70, Ill be 73. With ss-56000, RMD-we will have about 3m- and a pension-we will be around 160000- at 80 we will be at 220000. I'm at 15% now I might just move up to 25% and hit the Roth hard. I'm 64 wife 61, she still works. I saved all my life and live on 60000 now. SS and RMD go's up every year after 70.

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Re: Avoiding Taxes with RMD

Post by Christine_NM » Thu May 25, 2017 8:43 pm

I agree with Celia. The time has come to pay the piper. This is no surprise for you, only an attitude adjustment. Three things affect my tax situation most:

First, I use part of my RMD to withhold all state and federal taxes for the year. I can skip estimated taxes or withholding on my sources of income. It's like I found a new pot of money to pay the IRS, so I can live on my usual income seemingly tax-free if I want to think of it that way.

Second, You do not seem interesting in charitable giving, but there is a charitable gift annuity that allows carryover deductions for 5 years up to 50% of your taxable income. And since a lot of the annuity is return of principal to you, most of it is tax-free for many years. This type of annuity has increased my total income and decreased my taxable income. If you are curious, see http://www.acga-web.org .

A third item is tax-loss harvesting in your taxable account. It's good to maintain a capital loss carryover -- not as good as a profitable investment, but Uncle Sam will help with capital losses if you TLH.

Hope this helps a little. There really is no problem. The RMDs grow very slowly only if your IRA investments grow too.
10% cash 45% stock 45% bond. Retired, w/d rate 1.5%

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Re: Avoiding Taxes with RMD

Post by my name » Fri May 26, 2017 5:45 am

Where to put the RMD distribution. I'm thinking into a national federal tax exempt fund at Vanguard. With NJ moving to no state taxes for retirement income, that seems a great way to both not add to taxes and also re-balance from my being 70% stock. It also helps diversify my muni bond holdings, my largest taxable is state NJ tax exempt in Vanguard. Munis have done really well over the years I've had them, often beat the total bond index before taxes were considered: http://time.com/money/3835309/retiremen ... tion-roth/

The Roth conversion can continue to be done after the RMD is satisfied. Perhaps to the top of the tax bracket.

Christine, How do you manage (where do you "put") RMD proceeds to withhold for taxes - how does this satisfy the government need for estimated taxes or withholding on the source?

Hubert, my numbers are similar but about half yours, I am single. SS will be 40K, IRAs401K about 1.2 m, taxable about 1m, also a small pension and bank accounts.

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Re: Avoiding Taxes with RMD

Post by mouses » Fri May 26, 2017 5:51 am

Alan S. wrote:The optimal time to address this issue is in the years between retirement and the start of SS benefits and also the years between retirement and 70.5. To the extent the above two periods run concurrently, those are the years you can allocate the most dollars to Roth conversions and pay a lower tax rate on those conversion than you would otherwise pay on your RMDs had the pre tax plans not been converted.
I didn't realize this until several years in, sigh.

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Re: Avoiding Taxes with RMD

Post by cherijoh » Fri May 26, 2017 6:12 am

JW-Retired wrote:
my name wrote:In 2016 I had a calm tax year, owed no taxes and only used the itemized deductions thanks to some medical costs. I have lived off of money that was already taxed and a small pension, and delay social security until 70.
By "owed no taxes" do you mean you paid zero income tax in 2016? If so, 2016 would have been a great year to do some Roth conversions, so in 2018 when you are taking RMDs and SS your tax hit would be reduced.

What's your tax situation going to be in 2017?
JW
Yeah it sounds like the OP failed to take a long-range view of his/her taxes in retirement and has opted to minimize taxes each year since retirement. Only now has it occurred to him/her that the tax bill he/she postponed is coming due.

OP - there is no magic bullet to make your taxes disappear. You could make a qualified charitable distribution (QCD) if you don't need the money and want to make a charitable contribution. But otherwise I think you are stuck paying the piper.

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Re: Avoiding Taxes with RMD

Post by my name » Fri May 26, 2017 6:54 am

A quick overview of what to do ...
http://time.com/money/4377233/retiremen ... d=sr-link1

Excerpts:

1) (Annuity, delay up to age 85) QLAC purchase is limited to 25% of your portfolio or a maximum of $125,000.

2) (Charity) donate up to $100,000 of your RMD to charity.

3) (Health insurance, if) not already on Medicare, with high-deductible plans, fund a health savings account,

4) savings account, which is sheltered from federal income taxes.

ENDING: But don’t let tax and RMD considerations dictate your strategy. Hopefully, you have benefited a great deal over the years by having your savings compound tax-deferred, possibly while in a higher tax bracket. This money was always meant to be withdrawn, hopefully at a lower tax rate, and used to live well in retirement.

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Re: Avoiding Taxes with RMD

Post by IowaFarmBoy » Fri May 26, 2017 7:05 am

Another thing to keep in mind as you plan, I tend to assume that our status will always be married. The unfortunate reality is that it is likely that either my spouse or I will pass and the survivor will be filing as single for some period of time. This has considerable impact on standard deductions and tax brackets. This makes me more willing to pay the piper now by doing some additional Roth conversions.

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Re: Avoiding Taxes with RMD

Post by my name » Fri May 26, 2017 7:11 am

cherijoh wrote:Yeah it sounds like the OP failed to take a long-range view of his/her taxes in retirement ... Only now has it occurred to him/her that the tax bill he/she postponed is coming due.
Not true. I've no interest in IRA to charity while living, and no need nor interest in an annuity as you suggest.

You must be young. Roths are relatively new for my age. I used them when they became available. Conversions were reviewed and made no sense while working. After retirement, they made no sense in years with other taxable events, like selling rental property. Roths are not advisable for a number of reasons, including at times age. Younger people have better planning opportunities with Roths.

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Re: Avoiding Taxes with RMD

Post by The Wizard » Fri May 26, 2017 8:51 am

my name wrote: ...You must be young. Roths are relatively new for my age. I used them when they became available. Conversions were reviewed and made no sense while working. After retirement, they made no sense in years with other taxable events, like selling rental property. Roths are not advisable for a number of reasons, including at times age. Younger people have better planning opportunities with Roths.
I'm 67 and yes, Roth IRAs are relatively new. I did CONTRIBUTE $6500/year to my Roth in addition to my 403(b) contributions while employed.
Retired for a few years now, I've been CONVERTING about $18,000 per year from my 403(b) to my Roth IRA.
This is only a few percent of my 403(b) accum, so it won't amount to a large # by the time I start RMD in 2020.
But it takes the edge off...
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Re: Avoiding Taxes with RMD

Post by my name » Fri May 26, 2017 9:14 am

The Wizard wrote:
my name wrote: ...You must be young. Roths are relatively new for my age. I used them when they became available. Conversions were reviewed and made no sense while working. After retirement, they made no sense in years with other taxable events, like selling rental property. Roths are not advisable for a number of reasons, including at times age. Younger people have better planning opportunities with Roths.
I'm 67 and yes, Roth IRAs are relatively new. I did CONTRIBUTE $6500/year to my Roth in addition to my 403(b) contributions while employed.
Retired for a few years now, I've been CONVERTING about $18,000 per year from my 403(b) to my Roth IRA.
This is only a few percent of my 403(b) accum, so it won't amount to a large # by the time I start RMD in 2020.
But it takes the edge off...
I agree, Wizard. It'll take some edge off. And you feel you are doing what you can do. I had 3 years since retiring where I could have done that but didn't. Last year I should have, this year I probably will. It is a drop of water in a gallon big bucket. And I will review doing this, depending on the tax effect, in future years after the RMD is satisfied. So far, my projections for next year do not show an increase in income to the level where the cost of Medicare "things" increase.

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Re: Avoiding Taxes with RMD

Post by House Blend » Fri May 26, 2017 12:11 pm

my name wrote:Where to put the RMD distribution. I'm thinking into a national federal tax exempt fund at Vanguard. With NJ moving to no state taxes for retirement income, that seems a great way to both not add to taxes and also re-balance from my being 70% stock. It also helps diversify my muni bond holdings, my largest taxable is state NJ tax exempt in Vanguard. Munis have done really well over the years I've had them, often beat the total bond index before taxes were considered: http://time.com/money/3835309/retiremen ... tion-roth/

The Roth conversion can continue to be done after the RMD is satisfied. Perhaps to the top of the tax bracket.

Christine, How do you manage (where do you "put") RMD proceeds to withhold for taxes - how does this satisfy the government need for estimated taxes or withholding on the source?

Hubert, my numbers are similar but about half yours, I am single. SS will be 40K, IRAs401K about 1.2 m, taxable about 1m, also a small pension and bank accounts.
OK, with these hard numbers, let me offer my $0.02:

First RMD on $1.2M (assuming you turn 70.5 and 71 in the same year) is about $45.5K.

With SS benefits of $40K, you get beyond the SS tax hump once you have non-SS income above $48,700. If the $1M taxable account throws off distributions in the range of 2% to 3% every year, that's another $20K to $30K of income. Add that to your RMD, and it's clear that you're well above the hump. Which is good news, because it makes tax planning simpler. And note that switching to muni funds in taxable won't change that. Tax-exempt interest participates in SS taxation and medicare premium calculations too.

So your $40K of SS benefits will be 85% taxable: that's $34K. Add an RMD of $45K and we're at $79K. If you are taking only the standard deduction, the ballpark we are talking about is $67K in taxable income so far. That's the middle of the 25% bracket.

Now let's bring the $1M taxable account into the picture. As mentioned, it might produce $20K to $30K of dividend distributions. Some of it could be tax-exempt interest. But even if it's $30K of taxable, but qualified, dividends there is no danger of you paying a 28% marginal rate. All of those dividends will be taxed at the 15% rate (until tax laws change).

In the 25% bracket, there isn't a huge advantage to muni funds in taxable compared to nominal bonds in taxable. But there is a huge advantage to keeping bonds in your tax-deferred accounts: the interest remains tax-sheltered, and it puts a lid on the expected growth of your RMDs.

Also, a ballpark for your modified AGI for medicare premiums would be $34K + $45K + $20K to $30K = $99K to $109K. One of the key tiers is $107K, so that would argue for keeping an eye out for lower yields. In taxable, you'd rather see more Total Stock (less International), and short term muni bonds, not intermediate, to have a better chance to stay below $107K. Some more Roth conversion or qualified charitable distributions from the IRA could help here as well.

I think the most important thing you should be doing is to (a) decide on the appropriate overall AA (you mention being 70% equity, with a desire to lower it), and (b) consistent with that, prioritize bonds/fixed income in tax-deferred and equity in Roth/taxable. Having *some* muni funds in taxable is probably fine.

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Re: Avoiding Taxes with RMD

Post by my name » Fri May 26, 2017 5:44 pm

House Blend wrote:OK, with these hard numbers, let me offer my $0.02:
Thank you, House Blend. Lots to think about as I use a copy of TurboTax from 2016 to play with entering RMD and SS.

On comparing the munis at Vanguard, the intermediate has done better than the shortterm, but I realize we are entering a time with probably (slow) growth of rates that may favor shortterm.

After this holiday week, I may enter my "stuff" in a new topic and see what feedback I get.

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Re: Avoiding Taxes with RMD

Post by rkhusky » Fri May 26, 2017 7:37 pm

my name wrote: On comparing the munis at Vanguard, the intermediate has done better than the shortterm, but I realize we are entering a time with probably (slow) growth of rates that may favor shortterm.
Intermediate provides higher dividends because it is riskier. It should always provide higher dividends. If interest rates increase, the share price will drop temporarily, but the dividends will increase, such that, after 5-6 years for Intermediate, you will be back even as if the price did not drop. From then on you will be better off. So, your time frame for owning Intermediate should be greater than 5-6 years.

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Re: Avoiding Taxes with RMD

Post by my name » Fri May 26, 2017 7:42 pm

Thank you !

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Re: Avoiding Taxes with RMD

Post by Lynette » Fri May 26, 2017 8:06 pm

I retired at the end of 2016, effective 1/1/2017 at the age of 73. I did not have to take RMDs as my 401K was with my employer. I took an RMD of X amount from my 401K and as the market is doing well, my 401K has made up the X amount so that the balance is the same now as on 12/31/2017. I have two pensions, full SS and RMDs and I also have to pay Medicare B and D IRMAA. I just had my first Welcome to Medicare checkup - first year is covered 100%. Doctor did all the tests and told me he'd see me next year. I was not aware that Medicare was means tested. I guess I'm fortunate - so I just pay the taxes and don't bother to think about it.

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Re: Avoiding Taxes with RMD

Post by dodecahedron » Fri May 26, 2017 8:32 pm

Lynette wrote:I guess I'm fortunate - so I just pay the taxes and don't bother to think about it.
Good way to look at it. :)

In your case, since you worked up to your early 70s, you really didn't have a window to do any "smoothing" as folks who retire before RMD age do, but you are clearly well prepared with good planning and provision for your retirement expenses, including your tax bill.

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Re: Avoiding Taxes with RMD

Post by Christine_NM » Fri May 26, 2017 8:48 pm

Christine, How do you manage (where do you "put") RMD proceeds to withhold for taxes - how does this satisfy the government need for estimated taxes or withholding on the source?
With Vanguard RMD service you can set the RMD federal and state withholding percent to whatever will cover your safe-harbor tax amounts for the year (100 or 110% of last year's obligation). I figure out the safe harbor amounts after each year's tax is filed. Then I figure what percent of the RMD will need to be withheld for state and for federal to cover the safe harbor amounts. Then I update online the tax rates to be applied to the current year's RMD.

No income sources (SS, pension, annuity, fund distributions, savings bond redemption) have any withholding tax taken out. This is strictly optional on any income I know of but often there is a default withholding if you do not specify.

It does not really matter where the money comes from but this seems like the easiest way to me. I get all legal necessities (taking the RMD and withholding safe harbor amounts) done in one annual transaction. Easy for record keeping.
10% cash 45% stock 45% bond. Retired, w/d rate 1.5%

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Re: Avoiding Taxes with RMD

Post by tomd37 » Fri May 26, 2017 9:19 pm

Based on the replies I see here, I guess we all have our individual ways on handling federal and state tax withholding and payment based on individual circumstances. I retired from the US Navy back in 1981 and set up my federal withholding amounts back then. My wife started taking social security benefits twenty years ago in 1997 and we established a federal withholding percentage for her at that time. I went on to retire from my civilian job in 2002 at age 65 and started social security benefits at that time also (possibly an error on my part but early deaths do occur in my family). At that time I set up withholding amount or percentages (SS) for federal taxes. State taxes have never played a big part in our lives based on state locations.

My annual income is very stable and I have the current years estimated tax liability closely calculated in January of each year. Knowing our annual federal withholding from pensions and social security I am able to determine what percentage withholding is needed from our RMD in November and I tell Vanguard what percentage to withhold so that I come out owing as little as I can, but not having any refund coming if possible.

I volunteer in the AARP Tax-Aide program preparing tax returns and don't encourage taxpayers to "mess" too much with their withholding amounts or percentages for fear of error on someone's part along the line somewhere. Of course if withholding is way out of line or not needed at all I encourage some type of action.
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Re: Avoiding Taxes with RMD

Post by itstoomuch » Fri May 26, 2017 10:18 pm

we use GLWB annuities that at RMD friendly :D .
However this type of annuity comes with a price :annoyed .
IMO, we are not avoiding taxes but delaying the tax owed to either your later years or to your heirs :? .
ymmv :greedy
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Re: Avoiding Taxes with RMD

Post by my name » Sat May 27, 2017 5:56 am

itstoomuch said: IMO, we are not avoiding taxes but delaying the tax owed to either your later years or to your heirs.

I agree, I've heard this many times before. Smoothing in years between retirement and 70.5 is not an option (every year) for many, and for many it provides some but not much help. The taxman is coming sooner or later.

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Re: Avoiding Taxes with RMD

Post by cherijoh » Sat May 27, 2017 6:58 am

my name wrote: You must be young. Roths are relatively new for my age. I used them when they became available. Conversions were reviewed and made no sense while working. After retirement, they made no sense in years with other taxable events, like selling rental property. Roths are not advisable for a number of reasons, including at times age. Younger people have better planning opportunities with Roths.
Hardly. I will be retiring in either 2018 or 2019. :happy And I will definitely be making Roth conversions at least up to the top of the 15% tax bracket between then and 70, since SS + RMDs will put me in a higher tax bracket (under the current tax plan). If the tax law changes I will still have the advantage of having diversified my account types by tax status.

If the stock market tanks during that period, I'll probably take advantage and convert past the 15% limit. I did Roth conversions up to 15% limit while underemployed in 2008-09. My Roth now sits at 15% of my retirement nest egg, even though prior to the conversions it represented less than 2% of it! (NOTE: Rollover IRA and 401k have the bulk of my bond funds so have lower expected returns than Roth). If I hadn't done those conversions, my future RMDs would have been that much larger.

I stand by my point. You chose not to take advantage of your best opportunity to reduce your RMDs going forward. Go back and reread Celia's excellent post. If you regard your entire tIRA as your money, then it will never "make sense" to do a Roth conversion. But if you look at from the perspective of "purchasing power" (per author James Lange) you will realize that you can often pay taxes now to do a Roth conversion in low income years and save a bundle later when you hit your RMD years.

BTW, in your original post you made no mention of other "taxable events" (or considering but rejecting Roth IRAs) and simply mentioned paying no tax in 2016. Hence my conclusion that you hadn't done any advance tax planning.

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Re: Avoiding Taxes with RMD

Post by cherijoh » Sat May 27, 2017 7:18 am

House Blend wrote: First RMD on $1.2M (assuming you turn 70.5 and 71 in the same year) is about $45.5K.

With SS benefits of $40K, you get beyond the SS tax hump once you have non-SS income above $48,700. If the $1M taxable account throws off distributions in the range of 2% to 3% every year, that's another $20K to $30K of income. Add that to your RMD, and it's clear that you're well above the hump. Which is good news, because it makes tax planning simpler. And note that switching to muni funds in taxable won't change that. Tax-exempt interest participates in SS taxation and medicare premium calculations too.

So your $40K of SS benefits will be 85% taxable: that's $34K. Add an RMD of $45K and we're at $79K. If you are taking only the standard deduction, the ballpark we are talking about is $67K in taxable income so far. That's the middle of the 25% bracket.

Now let's bring the $1M taxable account into the picture. As mentioned, it might produce $20K to $30K of dividend distributions. Some of it could be tax-exempt interest. But even if it's $30K of taxable, but qualified, dividends there is no danger of you paying a 28% marginal rate. All of those dividends will be taxed at the 15% rate (until tax laws change).

In the 25% bracket, there isn't a huge advantage to muni funds in taxable compared to nominal bonds in taxable. But there is a huge advantage to keeping bonds in your tax-deferred accounts: the interest remains tax-sheltered, and it puts a lid on the expected growth of your RMDs.

Also, a ballpark for your modified AGI for medicare premiums would be $34K + $45K + $20K to $30K = $99K to $109K. One of the key tiers is $107K, so that would argue for keeping an eye out for lower yields. In taxable, you'd rather see more Total Stock (less International), and short term muni bonds, not intermediate, to have a better chance to stay below $107K. Some more Roth conversion or qualified charitable distributions from the IRA could help here as well.

I think the most important thing you should be doing is to (a) decide on the appropriate overall AA (you mention being 70% equity, with a desire to lower it), and (b) consistent with that, prioritize bonds/fixed income in tax-deferred and equity in Roth/taxable. Having *some* muni funds in taxable is probably fine.
Good analysis. Anyone retiring before being Medicare eligible should be careful with timing of Roth conversions. I think SSA uses the most recent tax return, so for 2017 it is likely to be your 2015 taxes (filed in 2016).

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Re: Avoiding Taxes with RMD

Post by midareff » Sat May 27, 2017 8:11 am

Same boat... 70 later this year and will start RMD next year to avoid a double RMD hit in calendar 2019. SS, pension, taxable dividends, tax-exempt dividends and no place to hide. Have already done Roth conversions to the top of the 15% bracket, accumulated tax loss harvesting and will be looking at 25% marginal (or more) the rest of this life. I guess I just have to view it as fortunate.

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Re: Avoiding Taxes with RMD

Post by my name » Sat May 27, 2017 8:30 am

cheri said: "You chose not to take advantage of your best opportunity to reduce your RMDs going forward"

Not true. Go back and reread my posts.

Last year was the year I really might have converted some to Roth, but it would have been one water drop in a big gallon bucket, no real impact.

I'm not listing reasons where a Roth conversion did not make sense for me in other years beyond the selling of rental property.
Last edited by my name on Sat May 27, 2017 8:34 am, edited 2 times in total.

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Re: Avoiding Taxes with RMD

Post by my name » Sat May 27, 2017 8:32 am

midareff wrote:Same boat... 70 later this year and will start RMD next year to avoid a double RMD hit in calendar 2019. SS, pension, taxable dividends, tax-exempt dividends and no place to hide. Have already done Roth conversions to the top of the 15% bracket, accumulated tax loss harvesting and will be looking at 25% marginal (or more) the rest of this life. I guess I just have to view it as fortunate.
Yeah, it is one of those "happy" problems. You made money.

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Re: Avoiding Taxes with RMD

Post by Ron » Sat May 27, 2017 9:42 am

my name wrote:cheri said: "You chose not to take advantage of your best opportunity to reduce your RMDs going forward"

Not true. Go back and reread my posts.

Last year was the year I really might have converted some to Roth, but it would have been one water drop in a big gallon bucket, no real impact.
Conversion of TIRA's to Roth's are a bit like questioning why somebody took SS at any age from 62 to 70. There will always be disagreements on what is the "correct" answer and the reality is that if you come up with an answer that you can live with, so be it - it was the correct answer for you.

My wife/me are both age 69. I retired at age 59, she at age 64. While both being in retirement for the last five years, we've been in the 25% marginal tax rate and we foresee continuing being in that rate even when our respective age-70 SS and RMD's continue next year.

Why didn't we convert our TIRA's to Roth's going to the top of the 25% rate? Simply, in our case the great majority of our retirement investments are in tax deferred funds with no taxable funds to pay the tax due if we would convert any amount.

Running several on-line calculators, we found that if we would use our tax deferred investments to pay taxes due, the loss of those funds remaining invested in the market would only increase our total joint holdings by $2-3k overall. That's not $2-3k per year, but total over our remaining lifespan.

For those that have taxable funds that can be used to pay taxes on the conversions, it would make a lot more sense to do so.

The "kicker" in our personal situation is the fact that most of those TIRA funds will be left in our estate to our disabled son, who will be drawing down the funds at a much lower tax rate than we could ever pay. In fact, since he does receive a very small paycheck working in a sheltered workshop, his credits as a "working poor" individual results in a negative tax rate each year. There is no reason to believe that he won't have a normal lifespan, but in the case that he doesn't, the remaining TIRA's will be going to our named charities tax-free.

A lot of current options on the table for today's "youngsters" (read anybody younger than us) were not available to us when we were in our mid/late 30's. At that time, we were covered by defined benefit (pension) plans, which were eliminated and replaced with traditional 401(k) plans. Roth 401(k) plans were never available to us during our working years. However, we did take advantage of Roth IRA's when they became available from 1998 until 2008, a year after I retired.

In the early years of 401(k)'s, the tax deferred desirability was a big selling point of the program. In 1982 when our respective companies started their 401(k) programs, very few people participated in the program. That was understandable since up to that time, many employees (and their parents/grandparents) were covered by a pension program that did not require them to "give up" income to be used sometime in the future. For a good many, the feeling was that any future was not guaranteed and it was easier to continue to live in the manner they became accustomed to rather than dialing it back by contributing to their own retirement. At least today, young people are more knowledgeable about a program that has been in place for decades and they understand that they must save for their future, regardless if it comes - or not.

They also have the advantage of knowing that TIRA's will require taxes to be paid sometime in the future and can invest in taxable funds to cover that expected tax bullet. In addition, many now have the ability to eliminate future taxes if they have a Roth 401(k) available. There are many more "products" and knowledge about taxes that were not known/understood by those of us on the bleeding edge of retirement planning, many decades ago.

FWIW,

- Ron

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Re: Avoiding Taxes with RMD

Post by my name » Sat May 27, 2017 10:50 am

Ron, well said !

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Re: Avoiding Taxes with RMD

Post by vtMaps » Sat May 27, 2017 11:04 am

I haven't seen it mentioned yet in this thread, but have you considered solar tax credits? If you install a renewable energy system before 2020, you can take a tax credit for 30% of your cost. The credit is on the entire cost of the system, including batteries (if you want batteries) and labor.

--vtMaps
The optimist proclaims that we live in the best of all possible worlds; and the pessimist fears this is true. --James Branch Cabell

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Re: Avoiding Taxes with RMD

Post by itstoomuch » Sat May 27, 2017 11:07 am

++@Ron
:sharebeer
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Re: Avoiding Taxes with RMD

Post by Lynette » Sat May 27, 2017 12:36 pm

I would appreciate assistance on the timing of withdrawing the RMD and paying taxes. From what I understand, if you take out the RMD in December and have the taxes withheld, then one does not have to pay estimated tax ON THE RMD. I have two pensions, full SS and have to take a RMD. This is my first year of taking the RMD, so I took it in January. My company did not withhold enough tax so I paid both federal and state tax estimated tax payments. I am also having monthly tax withheld from my pensions and SS. I think the additional estimated taxes I paid are far greater than required as I did not want to underpay.

It is my understanding that I could have taken out the RMD and paid the tax for it in December. However, don't I still need to have enough withheld from my pensions and SS to meet the quarterly estimate tax requirements?

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Re: Avoiding Taxes with RMD

Post by Ged » Sat May 27, 2017 2:04 pm

my name wrote:
Alan S. wrote:Prior to reaching 70 is the ideal time to consider moving to a low income tax or no income tax state if you live in a high tax state.
Right. My high tax state of NJ just changed their law to keep seniors. They already did not tax SS. Now seniors will pay no tax on any retirement income as follows - from Forbes article:

"Under current New Jersey law, a couple filing jointly with total income of $100,000 or less can exclude up to $20,000 of retirement income (for a single filer, it’s $15,000). The enhanced tax break will be phased in over four years, so by 2020, a couple filing jointly can exclude up to $100,000 of retirement income and a single filer can exclude $75,000. So the break is more powerful for a single person, a widow, or widower. "

https://www.forbes.com/sites/ashleaebel ... 3500249446
Yes. This new law has me thinking that there may be a tax strategy out there for me that might involve doing ROTH conversions to avoid going over $100,000 in retirement income later in life.

Certainly it increases the incentive for Roth conversions pre-RMD.

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Re: Avoiding Taxes with RMD

Post by Ged » Sat May 27, 2017 2:11 pm

Lynette wrote:I would appreciate assistance on the timing of withdrawing the RMD and paying taxes. From what I understand, if you take out the RMD in December and have the taxes withheld, then one does not have to pay estimated tax ON THE RMD. I have two pensions, full SS and have to take a RMD. This is my first year of taking the RMD, so I took it in January. My company did not withhold enough tax so I paid both federal and state tax estimated tax payments. I am also having monthly tax withheld from my pensions and SS. I think the additional estimated taxes I paid are far greater than required as I did not want to underpay.

It is my understanding that I could have taken out the RMD and paid the tax for it in December. However, don't I still need to have enough withheld from my pensions and SS to meet the quarterly estimate tax requirements?
As far as timing goes I take my RMDs out early in the year. Then over the course of the year I take out any additional funds I need for expenses. Finally at the end of the year I take out what I need to hit the top of the 15% tax bracket and convert that to Roth funds. Once I start taking SS in 3 years I'll probably be doing only RMDs towards the end of the year.

For taxation you need to withhold enough to meet IRS safe-harbor requirements to avoid the need to pay estimated taxes.

That is either 90% of the previous year's taxes owed or 100% of the current year's. For high AGIs it may be 110%*

https://www.irs.gov/publications/p17/ch ... k100032383 See figure 4a.

* Thanks to BigJohn for pointing out this case in a followup message.
Last edited by Ged on Sat May 27, 2017 5:24 pm, edited 3 times in total.

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