Questions about RMDs

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Almost there
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Questions about RMDs

Post by Almost there » Mon Apr 30, 2018 8:54 pm

Still single and just turned 70. End of November I will start my RMD from the funds held at Vanguard. Is it wise to take out more than 3.65% this year so that my IRA A/C shrinks faster? It also makes sense to me to take the RMD from my Total Bond fund to allow for continued growth of my Total Stock fund. Most of the RMD I will transfer to my bond tax exempt fund. Should I pay the taxes from my other bond tax exempt fund or the Roth IRA?

Almost there

Spirit Rider
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Re: Questions about RMDs

Post by Spirit Rider » Mon Apr 30, 2018 9:33 pm

There is no real benefit to distributing more than the RMD if you are not even spending the RMD.

Also, I don't understand why you would invest most of the RMD in one tax exempt bond fund to distribute funds from another tax exempt bond fund or worse a Roth IRA.

If you want to reduce future RMDs you could do Roth conversions. This would have the same tax liability as distributions you don't need. You could do this up to the level where the money from the RMD that you don't need pays the taxes on the RMD's an Roth conversions.

Depending on your IRA account balance, marginal tax rate, IRMAA tiers, it might even make sense to use some of the tax exempt bonds or other taxable accounts to convert more to a Roth IRA.

chemocean
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Re: Questions about RMDs

Post by chemocean » Tue May 01, 2018 10:38 am

From numerous discussion on RMDs on this forum, taking Qualified Charitable Distributions (QCD) are identified and substantial. However, QCD must be part of the RMD and can only be taken after you actually turn 70.5 in November. If you attempt to take QCDs after you have withdrawn the entire required distribution, the contributions will not be considered QCDs for tax purposes. If you make contributions after the entire RMD has been withdrawn, the contribution will show up as income, but you can claim them on Schedule A. For tax efficiency, it was suggested to me that I purchase my Large cap index fund of choice with the RMD that I do not need to spend and then rebalance my bond allocation iny IRA to maintain my asset allocation.

kaneohe
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Re: Questions about RMDs

Post by kaneohe » Tue May 01, 2018 10:57 am

chemocean wrote:
Tue May 01, 2018 10:38 am
From numerous discussion on RMDs on this forum, taking Qualified Charitable Distributions (QCD) are identified and substantial. However, QCD must be part of the RMD and can only be taken after you actually turn 70.5 in November. If you attempt to take QCDs after you have withdrawn the entire required distribution, the contributions will not be considered QCDs for tax purposes. If you make contributions after the entire RMD has been withdrawn, the contribution will show up as income, but you can claim them on Schedule A. For tax efficiency, it was suggested to me that I purchase my Large cap index fund of choice with the RMD that I do not need to spend and then rebalance my bond allocation iny IRA to maintain my asset allocation.
I believe there are some misconceptions here:
You can take QCD as part of the RMD or after. For maximum efficiency (minimum w/d from IRA) you would want to take the QCD as part of the RMD. However if you take the QCD after the RMD, they are still valid QCD which you don't have to report as taxable income....however you will have removed more from the IRA than necessary. You either report them as QCDs (don't report as taxable income on 1040 line 15b) and don't claim them on Sch A as itemized deduction
or don't report as QCD (report as taxable income on 1040 line 15b) but claim on Sch A as itemized deduction...........either/or but not both .......

Almost there
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Re: Questions about RMDs

Post by Almost there » Thu May 03, 2018 5:55 pm

Spirit Rider wrote:
There is no real benefit to distributing more than the RMD if you are not even spending the RMD.

Also, I don't understand why you would invest most of the RMD in one tax exempt bond fund to distribute funds from another tax exempt bond fund or worse a Roth IRA.
I had written that in order to satisfy my RMD, I would transfer from my IRA Total Bond fund to one of my tax exempt bond funds. What is wrong with that? This way my asset allocation stays the same and my other IRA Total Stock would continue to grow.

Almost there

123
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Re: Questions about RMDs

Post by 123 » Thu May 03, 2018 6:47 pm

It could be advantageous to take out more than your RMD depending on your other income and your tax bracket. If your taxes are non-existent you could withdraw more than the RMD and convert the extra to a Roth (watching the impact of any excess on your taxes of course). If you receive Social Security your other income, including IRA distributions, could impact how much of your Social Security is taxable.
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Almost there
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Re: Questions about RMDs

Post by Almost there » Thu May 03, 2018 7:51 pm

Thank you 123. I am in the 12% tax bracket. I just ran a simulated 2018 tax calculation (my third one) and they all indicated that I would owe approximately $800 in taxes (I have no taxes taken out of my Social Security payments).

You also brought up the point, as did Spirit Rider, to take money out of my IRAs and then convert to a Roth IRA. Is that preferable to taking a higher RMD?

Spirit Rider
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Re: Questions about RMDs

Post by Spirit Rider » Thu May 03, 2018 8:12 pm

Almost there wrote:
Thu May 03, 2018 7:51 pm
You also brought up the point, as did Spirit Rider, to take money out of my IRAs and then convert to a Roth IRA. Is that preferable to taking a higher RMD?
If you have no need for the higher distribution, why not do Roth conversions. With the same amount, the taxes would be exactly the same.

Just remember that the actual RMD is not eligible for rollover.

Almost there
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Re: Questions about RMDs

Post by Almost there » Thu May 03, 2018 9:14 pm

Thank you Spirit Rider who wrote:
If you have no need for the higher distribution, why not do Roth conversions. With the same amount, the taxes would be exactly the same.

Just remember that the actual RMD is not eligible for rollover.
I would think that a Roth conversion would be higher taxes than a higher distribution.

The Wizard
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Re: Questions about RMDs

Post by The Wizard » Thu May 03, 2018 9:15 pm

Spirit Rider wrote:
Thu May 03, 2018 8:12 pm
Almost there wrote:
Thu May 03, 2018 7:51 pm
You also brought up the point, as did Spirit Rider, to take money out of my IRAs and then convert to a Roth IRA. Is that preferable to taking a higher RMD?
If you have no need for the higher distribution, why not do Roth conversions. With the same amount, the taxes would be exactly the same.

Just remember that the actual RMD is not eligible for rollover.
I'm doing Roth conversions in my 60s, prior to SS and RMDs, obviously.
But it makes no sense for me to do Roth conversions after age 70/70.5 since my AGI will be higher than ever.
Your Mileage May Vary...
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The Wizard
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Re: Questions about RMDs

Post by The Wizard » Thu May 03, 2018 9:17 pm

Almost there wrote:
Thu May 03, 2018 9:14 pm
Thank you Spirit Rider who wrote:
If you have no need for the higher distribution, why not do Roth conversions. With the same amount, the taxes would be exactly the same.

Just remember that the actual RMD is not eligible for rollover.
I would think that a Roth conversion would be higher taxes than a higher distribution.
No, taxes would be the same...
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Almost there
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Re: Questions about RMDs

Post by Almost there » Thu May 03, 2018 9:22 pm

Thanks, The Wizard. Does Vanguard handle the whole transfer, which I recognize is separate from my RMD?
In the meantime I will run another scenario to check in the advance how much it'll cost me on taxes.

The Wizard
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Re: Questions about RMDs

Post by The Wizard » Thu May 03, 2018 9:26 pm

Vanguard does the Roth conversion part just fine.
But it's up to you to do your RMD first, since Vanguard has no idea what other IRA or 401(k) assets you have at other custodians...
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Almost there
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Re: Questions about RMDs

Post by Almost there » Fri May 04, 2018 7:34 pm

Hi The Wizard,
In the meantime I found a post here on Boglehead about RMDs and Roth IRA conversions from Michael Kitces:(dated: 11/29/17)
Those who are subject to RMD must take RMD first before doing any Roth conversions. The RMD cannot be converted to Roth.

Checked my probable 2018 taxes on: https://www.mortgagecalculator.org/calc ... ulator.php
I input the same dividends and interest as for 2017. Then added my new Social Security benefits and RMD distributions. Since the RMD distribution is not needed for every day expenses, I would deposit it into the taxable Total Stock fund.

Did 3 different scenarios: (all have a 12% Tax bracket):

THE FOLLOWING INFO HAS BEEN UPDATED:


My RMD is $16,750
distributions % of total income

$16,750.00 $881.00

$16,750.00 and $5,000 $1,976.00
RMD and TIRA to Roth conversion

$16,750.00 and $10,000 $3,086.00
RMD and TIRA to Roth conversion

From which fund do I pay the taxes for the RMD?
I have 3 taxable accounts: 2xTax exempt bond funds and 1xTotal Stock fund
And 2 Roth IRA accounts: total bond and total stock
Last edited by Almost there on Wed May 09, 2018 5:31 pm, edited 1 time in total.

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celia
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Re: Questions about RMDs

Post by celia » Fri May 04, 2018 8:36 pm

Have the taxes withheld monthly from your SS or withheld from your RMD (which is going to taxable anyway). The investment it comes from can depend on what you want your remaining portfolio to look like.
Almost there wrote:
Thu May 03, 2018 5:55 pm
...I would transfer from my IRA Total Bond fund to one of my tax exempt bond funds. What is wrong with that? This way my asset allocation stays the same and my other IRA Total Stock would continue to grow.
I would withdraw from a stock fund instead and have the growth from the stock fund happen in taxable. The asset allocation could remain the same and you will pay taxes only on dividends each year and capital gains when it is cashed in. In the 12% tax bracket, qualified dividends are not even taxed, but the interest earned by bonds is. But if you allow the fastest-growing asset to remain in the tIRA, you are just increasing the amount of your future RMDs and your future taxes on withdrawals .

Since a dollar in taxable is worth more than a dollar in tax-deferred, I would want to maximize the growth in the Roth and taxable over growth in tax-deferred.

After taking the RMD and accounting for SS, if you still have room in the 12% tax bracket, why not do a Roth conversion to the top of the 12% bracket? Convert some shares of a stock fund and let it continue growing tax-free in the Roth.
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.

Almost there
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Re: Questions about RMDs

Post by Almost there » Mon May 07, 2018 7:18 pm

Thank you celia for your in depth explanation and stating that it is preferable, “…. to withdraw from a IRA stock fund and have the stock fund happen in taxable.” The money will grow in my taxable stock fund account and I would, “… pay taxes only on dividends each year…”
I would withdraw from a stock fund instead and have the growth from the stock fund happen in taxable. The asset allocation could remain the same and you will pay taxes only on dividends each year and capital gains when it is cashed in. In the 12% tax bracket, qualified dividends are not even taxed, but the interest earned by bonds is. But if you allow the fastest-growing asset to remain in the tIRA, you are just increasing the amount of your future RMDs and your future taxes on withdrawals .
As I mentioned above, I was planning to withdraw from my IRA Total Bond fund and transfer it to one of my tax exempt bond funds. The exempt-interest dividends are not taxed, only the capital gain distribution (in 2017 it was $74.12) and total ordinary dividends (in 2017 $2.46). I am still on the fence with taking either bonds or stocks from my TIRA account, but I still have until November to make up my mind.

After my RMD has been done, I am also planning to do a conversion from TIRA to Roth IRA of $5,000. Since this is my first RMD and conversion along with new tax laws for 2018, it'll give me a chance to see how it all works out with the federal and state laws.

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House Blend
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Re: Questions about RMDs

Post by House Blend » Tue May 08, 2018 10:34 am

Almost there wrote:
Fri May 04, 2018 7:34 pm
Did 3 different Taxable IRA distributions:

Taxable IRA
distributions Taxes due Tax Bracket

$16,750.00 $881.00 12%
$21,750.00 $1,976.00 12%
$26,750.00 $3,086.00 12%
FYI, as you can see from this calculation, you are in the 12% bracket, but your Federal marginal tax rate is about 22%.

In fact it's probably 1.85 * 12 = 22.2%, due to the way your SS benefits interact with taxable income.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

While I agree with others that a Roth conversion always makes more sense than taking out more than the RMD [unless you need the excess distribution to cover expenses], in this case, you should also be questioning whether a Roth conversion makes sense. There should at least be the prospect of a higher marginal rate in your future. For Single taxpayers that have already started SS and RMDs, those prospects are usually slim.

Also, I agree with celia that you should prioritize stocks in taxable and bonds in tax-deferred. Just because muni bond interest is tax free doesn't make it a good idea. Taking RMDs from your stock funds also has the secondary benefit is that it limits the growth of your future RMDs and the potential to jump into the next tax bracket.

And neither qualified dividends nor "tax exempt" interest are tax free in your case, because you are in the middle of the SS tax hump. In fact, your marginal tax rate on both muni bond interest and qualified dividends is 0.85 * 12% = 10.2%.

A test to see whether or not the tax calculator you are using is any good: (1) It should have an entry for tax-exempt interest. (2) If you add $1000 of tax-exempt interest, you should see your taxes go up by ~$100.

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Epsilon Delta
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Re: Questions about RMDs

Post by Epsilon Delta » Wed May 09, 2018 10:03 am

House Blend wrote:
Tue May 08, 2018 10:34 am
Almost there wrote:
Fri May 04, 2018 7:34 pm
Did 3 different Taxable IRA distributions:

Taxable IRA
distributions Taxes due Tax Bracket

$16,750.00 $881.00 12%
$21,750.00 $1,976.00 12%
$26,750.00 $3,086.00 12%
FYI, as you can see from this calculation, you are in the 12% bracket, but your Federal marginal tax rate is about 22%.

In fact it's probably 1.85 * 12 = 22.2%, due to the way your SS benefits interact with taxable income.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

While I agree with others that a Roth conversion always makes more sense than taking out more than the RMD [unless you need the excess distribution to cover expenses], in this case, you should also be questioning whether a Roth conversion makes sense. There should at least be the prospect of a higher marginal rate in your future. For Single taxpayers that have already started SS and RMDs, those prospects are usually slim.
For some taxpayers once 85% of SS income is taxed the marginal tax rate drops back to 12%. For these people making a larger Roth conversion in a single year may reduce life time taxes. The simplest way to check this is to extend Almost there's table by a few more $5k increments until the tax reaches the top of the 12% bracket at $4,500 or so. It's not impossible that he may be able to convert an additional $11k or so at 12%.

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House Blend
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Re: Questions about RMDs

Post by House Blend » Wed May 09, 2018 10:15 am

^Agreed. Certainly it depends on the details. I think for Singles, it is common to cross over from the 12% to the 22% bracket before moving beyond the SS tax hump.

One also needs to look at crossing IRMAA thresholds.

In any case, my main point is that a Roth conversion for the OP isn't a no brainer. Nor is it clearly a bad idea.

Almost there
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Re: Questions about RMDs

Post by Almost there » Wed May 09, 2018 5:44 pm

House blend wrote (and I thank you for your time):
And neither qualified dividends nor "tax exempt" interest are tax free in your case, because you are in the middle of the SS tax hump. In fact, your marginal tax rate on both muni bond interest and qualified dividends is 0.85 * 12% = 10.2%.

A test to see whether or not the tax calculator you are using is any good: (1) It should have an entry for tax-exempt interest. (2) If you add $1000 of tax-exempt interest, you should see your taxes go up by ~$100.
Thank you for your response. In the meantime, I updated my post dated May 4th.

Also, as I look at my 1099-DIV statement for 2017, the two tax exempt funds added up to $2,387 and were on my 1040 Line 8b. So they didn't add to my AGI.

In the meantime, I did further investigation into what both celia and you wrote. YES, withdrawing from my Total Stock Fund certainly makes more sense and then will be transferred to my taxable Total Stock Fund.

Now you also wrote:
In fact it's probably 1.85 * 12 = 22.2%, due to the way your SS benefits interact with taxable income.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits
Now where did you get the 1.85 * 12 = 22.2% ? Did that come from the Non SS Income Line $24,000?

Almost there
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Re: Questions about RMDs

Post by Almost there » Wed May 09, 2018 6:44 pm

The following info came from entering my 2018 tax info into the mortgagecalculator.org

Filing status: Single, no dependents
RMD $16,750 + $10,000 TIRA conversion to Roth
Ordinary dividends 880
Short term cap gain 3
Long term cap gain 75
Taxable IRA distribution 26,750 RMD $16,750 + $10,000 TIRA conversion to Roth
Taxable Social Security 12,079 Based on a modified AGI of $42,917 and a total benefit of $30,417
AGI 39,787

Standard deduction 13,600
Medical expenses 0 Actual $2,550, Allowed deduction: $0
Taxable income 26,187
Tax 2,943 You had a total of $75 subject to the lower long tem cap gains and dividend tax rates.
This reduced your total taxes due by $9
Total tax after credits 2,943


RMD: $16,750
Ordinary dividends 880
Short term cap gain 3
Long term cap gain 75
Taxable IRA distribution 16,750
Taxable Social Security 3,959 Based on a modified AGI of $32,917 and a total benefit of $30,417
AGI 21,667

Standard deduction 13,600
Medical expenses 925 Allowed. Actual expenses $2,550
Taxable income 8,067
Tax 799 You had a total of $75 subject to the lower long tem cap gains and dividend tax rates.
This reduced your total taxes due by $8
Total tax after credits 799

So if this is all correct, if I withdraw an additional $10,000 to convert from TIRA to Roth,
it will only cost me an additional $2,144?

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House Blend
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Re: Questions about RMDs

Post by House Blend » Thu May 10, 2018 9:45 am

Almost there wrote:
Wed May 09, 2018 5:44 pm
House blend wrote (and I thank you for your time):
And neither qualified dividends nor "tax exempt" interest are tax free in your case, because you are in the middle of the SS tax hump. In fact, your marginal tax rate on both muni bond interest and qualified dividends is 0.85 * 12% = 10.2%.

A test to see whether or not the tax calculator you are using is any good: (1) It should have an entry for tax-exempt interest. (2) If you add $1000 of tax-exempt interest, you should see your taxes go up by ~$100.
Thank you for your response. In the meantime, I updated my post dated May 4th.

Also, as I look at my 1099-DIV statement for 2017, the two tax exempt funds added up to $2,387 and were on my 1040 Line 8b. So they didn't add to my AGI.

In the meantime, I did further investigation into what both celia and you wrote. YES, withdrawing from my Total Stock Fund certainly makes more sense and then will be transferred to my taxable Total Stock Fund.

Now you also wrote:
In fact it's probably 1.85 * 12 = 22.2%, due to the way your SS benefits interact with taxable income.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits
Now where did you get the 1.85 * 12 = 22.2% ? Did that come from the Non SS Income Line $24,000?
Certainly it has to do with how much SS and non-SS income you have. Do read the linked wiki article on Taxation of Social Security Benefits.

Short version: The amount of your SS benefit that is taxable ranges from 0% to 85%. With low income it is 0%, with high income it is 85%. In between, you are in the Social Security Tax Hump.

There are two Humps: a small one, where each additional dollar of non-SS income makes an extra $0.50 of your SS benefit taxable, and a large one, where each additional non-SS dollar makes an extra $0.85 of your SS benefit taxable.

Then there is the issue of what "counts" as non-SS income. You might guess that it is simply everything in your AGI except your SS benefit, but that would be wrong. It also includes tax exempt interest.

Tax software should account for this (but hide it from you :annoyed ). If you are in the Hump, and adding tax-exempt interest doesn't change the tax due, then the calculation flawed. (Unless one has so many deductions that the tax due is $0.)

Another manifestation of the issue is whether it asks for the total SS benefit (line 20a on the 1040), rather than the taxable amount (line 20b). If you are in the Hump, adding tax-exempt interest should increase the amount on line 20b; that's the source of increased tax.

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celia
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Re: Questions about RMDs

Post by celia » Thu May 10, 2018 2:44 pm

Almost there wrote:
Wed May 09, 2018 6:44 pm
So if this is all correct, if I withdraw an additional $10,000 to convert from TIRA to Roth,
it will only cost me an additional $2,144?
That means 2,144/10,000 = 21.44% marginal tax rate if you convert (not counting any state taxes, by the way).

I suspect you may then be near the point where the maximum amount of your SS is then being taxed (since it is a little less than the 22% marginal tax rate).


An important concept that may not be understood involves the SS.

If the only income a person (or couple) has is SS, it is tax-free (as it is below the threshold for needing to pay any taxes). As their other income is added (whether pensions, dividends, interest, RMDs, rental income), more and more of the SS becomes taxed in addition to the taxes on the "other things". The maximum SS that is taxed is 85% of it. Then you have 85% of SS becoming taxed in addition to the "other things". Even if the taxes on the "other things" is 12%, when that is added to the 85% of SS also being taxed, that means the marginal tax rate on the total return went from 12% to up to 22%.

Almost there, if you tell us the amount of your entire expected SS for this year, we can tell you how close you are to having the entire 85% be taxed. We already know that the RMD will make some of it be taxed, so there is no choice in that. But to optimize Roth conversions (or even do them!), it will make a difference. The simple way to do this is to look at line 20a and 20b of your 2017 return and give us the numbers. If anything was shown in 20b, that is the amount of your SS that was already being taxed, without taking any RMDs or Roth conversions last year. Then we will include the RMD in this year's calculation, since there is no option to not receive it (without taking HUGE penalties that are worse than the tax). Finally, we can tell what the impact Roth conversions will make on your SS being taxed at 85%.
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.

MathWizard
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Re: Questions about RMDs

Post by MathWizard » Thu May 10, 2018 3:04 pm

Almost there wrote:
Thu May 03, 2018 7:51 pm
Thank you 123. I am in the 12% tax bracket. I just ran a simulated 2018 tax calculation (my third one) and they all indicated that I would owe approximately $800 in taxes (I have no taxes taken out of my Social Security payments).

You also brought up the point, as did Spirit Rider, to take money out of my IRAs and then convert to a Roth IRA. Is that preferable to taking a higher RMD?
There is no "higher RMD".

The RMD is the Minimum that is REQUIRED to be withdrawn (Distributed).
You can have a higher Distribution, but the extra Distribution is not an RMD, because it is not required,
and is not the Minimum.

If you mean : Is it better to convert the extra above the RMD to a ROTH account, or
invest in taxable, or spend it?

You can always spend it if you want, but of course you now have less money. That is up to you.

Taxable vs. ROTH: I'll take non-taxable versus Taxable anyday. With the ROTH, you pay nothing on
your earnings, ever. With taxable, your basis is not taxed, but earnings are. So your earnings are taxed,
and you need to keep track of your basis.

You may minimize taxes through tax loss harvesting and zero capital gains taxes in the lowest brackets
(that didn't change with the new tax law did it?) but you will still be taxed on dividends.
ROTH lets you not have to worry about any of that. Cheaper and easier, that I like.

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Re: Questions about RMDs

Post by Almost there » Thu May 10, 2018 3:09 pm

Thank you for writing. Here is your answer House Blend.

The software took into consideration the Social Security benefits for each case. I didn’t include in each of my 2 cases my Tax exempt interest dividend since it has never been added to my AGI before.

Just went back 4 years with regard to Federal Income Tax I filed.

2013 – living in NJ
Tax exempt interest dividend from Box 10 and on line 8b $2,630
AGI $36,803

2014 – living in NJ
Tax exempt interest dividend from Box 10 and on line 8b: $2,868
AGI $50,534

2015 – 10 months in NJ + 2 months in Arizona
Tax exempt interest dividend from Box 10 and on line 8b:2,411
Social Security: 20A $15,515, 20b $1,416
AGI $19,078 (which includes: Unemployment $10,340 + Wages $5,831 and interest)

2016 – living in AZ
Tax exempt interest dividend from Box 10 and on line 8b: $2,216
Social Security-20a $15,515, 20b $0
AGI $5,478 (sold treasury bonds)

4 different years with different AGIs and living in 2 different states but in each case, tax exempt interest dividends were never counted towards AGI. That is the reason, why I didn’t add it to my RMD totals.

Almost there
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Re: Questions about RMDs

Post by Almost there » Thu May 10, 2018 3:20 pm

celia wrote:
Almost there, if you tell us the amount of your entire expected SS for this year, we can tell you how close you are to having the entire 85% be taxed. We already know that the RMD will make some of it be taxed, so there is no choice in that. But to optimize Roth conversions (or even do them!), it will make a difference. The simple way to do this is to look at line 20a and 20b of your 2017 return and give us the numbers. If anything was shown in 20b, that is the amount of your SS that was already being taxed, without taking any RMDs or Roth conversions last year. Then we will include the RMD in this year's calculation, since there is no option to not receive it (without taking HUGE penalties that are worse than the tax). Finally, we can tell what the impact Roth conversions will make on your SS being taxed at 85%.
I had already given the answers you requested.

Filing status: Single, no dependents
RMD $16,750 + $10,000 TIRA conversion to Roth
Ordinary dividends 880
Short term cap gain 3
Long term cap gain 75
Taxable IRA distribution 26,750 RMD $16,750 + $10,000 TIRA conversion to Roth
Taxable Social Security 12,079 Based on a modified AGI of $42,917 and a total benefit of $30,417
AGI 39,787

I am retired and living on my Social Security benefits and funds at Vanguard
Social Security
for 2017: $15,552 on line 20a, no amount on 20b. My Social Security was not taxed since my AGI was $10,688.
Sold treasury bonds and had capital gain based on selling old stocks which I had inherited 20+ years ago.

for 2018: $30,417 (receiving higher amount due to my ex-husband passing)

Thanking you both for your help, celia and House blend.

Almost there
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Re: Questions about RMDs

Post by Almost there » Thu May 10, 2018 3:27 pm

Thank you MathWizard for your help.
You wrote:
There is no "higher RMD".

The RMD is the Minimum that is REQUIRED to be withdrawn (Distributed).
You can have a higher Distribution, but the extra Distribution is not an RMD, because it is not required,
and is not the Minimum.
Poor choice of words on my parts as to “higher RMD”. What I meant to write: Can I take out more than the RMD requires? Now I know that it is better to take your minimum RMD ($16,750) and then convert $10,000 from TIRA to Roth.

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House Blend
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Re: Questions about RMDs

Post by House Blend » Fri May 11, 2018 9:13 am

Almost there wrote:
Thu May 10, 2018 3:09 pm
2015 – 10 months in NJ + 2 months in Arizona
Tax exempt interest dividend from Box 10 and on line 8b:2,411
Social Security: 20A $15,515, 20b $1,416
AGI $19,078 (which includes: Unemployment $10,340 + Wages $5,831 and interest)

[...snip...]

4 different years with different AGIs and living in 2 different states but in each case, tax exempt interest dividends were never counted towards AGI. That is the reason, why I didn’t add it to my RMD totals.
Sigh. I'm failing to get my point across.

I'll try one more time and then sign out of this thread.

Let's take tax year 2015, and consider what your AGI would have been if you had had 0 tax exempt interest on line 8b. Your non-SS income that year was

AGI + line 8b - line 20b = 19078 + 2411 - 1416 = $20,073.

If we reset line 8b to 0, that would result in non-SS income of $17,662. If you use the IRS worksheet to determine how much of your $15,515 SS benefit would be taxable with that much non-SS income, you'll discover that it is $210. That's your new line 20b.

So your AGI would have been 17662 + 210 = $17,872, which is $1206 less than it was. How much that would have saved you in taxes depends on how much you claimed in deductions. In any case, it is wrong to think that your tax exempt interest had no effect on your AGI.

Almost there
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Re: Questions about RMDs

Post by Almost there » Thu May 17, 2018 7:14 pm

So followed House Blend's advise and ran my 1040 Tax Calculator for 2018 again:

Filing status: Single, no dependents
RMD $16,750 + $10,000 TIRA conversion to Roth
Tax-exempt interest $2,400
Ordinary dividends: $1,714
Qualified dividends: $834
Short term cap gain: $3
Long term cap gain: $75
Taxable IRA distribution 26,750: RMD $16,750 + $10,000 TIRA conversion to Roth
Taxable Social Security: $14,828 (Based on a modified AGI of $46,151 and a total benefit of $30,417)
AGI: $43,370
Standard deduction: minus $13,600
Taxable: $29,770
Tax: $3,273 (You had a total of $909 subject to the lower long term capital gains and dividend tax rates. This reduced your total taxes due by $109.)

Celia: Looking forward to reading your and everyone else's response as to my converting $10,000 to Roth.

wrongfunds
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Re: Questions about RMDs

Post by wrongfunds » Fri May 18, 2018 12:28 pm

Almost there wrote:
Thu May 03, 2018 7:51 pm
Thank you 123. I am in the 12% tax bracket. I just ran a simulated 2018 tax calculation (my third one) and they all indicated that I would owe approximately $800 in taxes (I have no taxes taken out of my Social Security payments).

You also brought up the point, as did Spirit Rider, to take money out of my IRAs and then convert to a Roth IRA. Is that preferable to taking a higher RMD?
This was your previous posting. By converting $10K, you are paying something like $3200 in taxes. So your taxes went up by approximately $2400 by the conversion. So you are paying tax rate of 24% on that conversion.

Are you sure this is what you want to do?

Can somebody else tell me why it is a good idea to do this conversion if the marginal (I hate that word!) tax rate on the conversion ends up as 24%? Wouldn't it be better NOT to do that? Especially given 3.65% RMD equates to $16750; thus value of never taxed retirement account is $500K. Frankly, as far as I can see, there is NO reason to do the conversion.

I don't want to be rude but I am suspecting the people telling you to do the conversion most likely have 10x times what you have. I don't think you have that "problem". You have no reason whatsoever to convert $10K in to ROTH. You will be paying MORE taxes over the years by doing that assuming everything else stays similar to what you have today.

Sorry if I am coming little bit too strong.

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Re: Questions about RMDs

Post by wrongfunds » Fri May 18, 2018 9:00 pm

I have looked at OP's numbers again.

I am now stating that people who are advising to him to do Roth conversion are giving patently bad advice. I am afraid they are using their own situation and wrongly applying to OP.

OP does NOT have multi-millions; OP does not have humongous pension or massive social security. AND MOST IMPORTANTLY he is single.

For somebody in his situation, suggesting that he pay voluntary around 22% tax on the Roth conversion is bordering on fiscally irresponsible advise.

If you disagree, please provide your rationale.

Beehave
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Re: Questions about RMDs

Post by Beehave » Fri May 18, 2018 9:14 pm

Regarding taking out a greater amount than required for RMD:

As mentioned in some responses above, this may affect your tax bracket and your Social Security taxation.

I did not read all replies, so in case it was not mentioned, there is another implication. Your Medicare payments (assuming you are on Medicare) may also be affected. The Medicare cost brackets are based on MAGI (your AGI plus your untaxed municipal bond income) so you should factor those bracket considerations in as well in any cost-benefit analysis you do for a greater-than-required withdrawal from the IRA.

Regarding moving RMD funds from a tax-sheltered IRA bond fund to a non-tax-sheltered municipal bond fund - - it makes sense to me because you are keeping your overall allocation in balance. Just beware that you should maintain enough in the bond fund in the IRA so that you don't get caught in the future having to take an RMD from your stocks when they happen to be way down. Regarding where the funds for the tax on the RMD should come from, why not just have Vanguard take out the appropriate amount from your transfer?

Best wishes.

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FiveK
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Re: Questions about RMDs

Post by FiveK » Sat May 19, 2018 4:18 pm

Almost there wrote:
Thu May 10, 2018 3:09 pm
The software took into consideration....
Seems you are reasonably comfortable using difference software packages (I'm assuming you use different ones for "real" taxes vs. estimate).

To see a fuller picture, you could enter your expected 2018 income (including tax-exempt interest) into the personal finance toolbox spreadsheet (download the Excel version).

Change cell Calculations!G106 to "D31" (w/o quotes) then click the "Update chart" button near L113. Does your RMD amount put you before, inside, or after the step up-and-down in marginal rate (due to Taxation of Social Security benefits)?

Almost there
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Re: Questions about RMDs

Post by Almost there » Sat May 19, 2018 5:25 pm

Thank you wrongfunds for your straightforward input.

I just ran the 1040 Tax Calculator again (https://www.mortgagecalculator.org).
Below are the figures for RMD $16,750 + $10,000 TIRA conversion to Roth
- second number is without TIRA/Roth conversion:

Filing status: Single, no dependents
RMD $16,750 + $10,000 TIRA conversion to Roth
Tax-exempt interest $2,400 – same amount
Ordinary dividends: $1,714 – same amount
Qualified dividends: $834 – same amount
Short term cap gain: $3 – same amount
Long term cap gain: $75 – same amount
Taxable IRA distribution $26,750: RMD $16,750 (+ $10,000 TIRA conversion to Roth) --$16,750

Taxable Social Security: $14,828 (Based on a modified AGI of $46,151 and a total benefit of $30,417)--
Without conversion: $6,328 (Based on a modified AGI of $36,151 and a total benefit of $30,417
AGI: $43,370 -- $24,870

Standard deduction: minus $13,600 – same amount
Medical and dental expenses $2,550: Allowed deduction: $0 -- $685
Total Taxable Income: $29,770 -- $11,270
Tax: $3,273 (You had a total of $909 subject to the lower long term capital gains and dividend tax rates. This reduced your total taxes due by $109.) --$1,053

Total taxes: $3,273 (with conversion) and $1,053 (without conversion) = Difference: $2,220

So the taxes for the $10,000 conversion would be $2,220. Not sure what my state will charge me.

I think that $2,220 for the $10,000 conversion is a bit high. If someone has different answers which have not as yet been explored, please write back.

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FiveK
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Re: Questions about RMDs

Post by FiveK » Sat May 19, 2018 6:31 pm

Almost there wrote:
Sat May 19, 2018 5:25 pm
So the taxes for the $10,000 conversion would be $2,220. Not sure what my state will charge me.

I think that $2,220 for the $10,000 conversion is a bit high. If someone has different answers which have not as yet been explored, please write back.
You are already paying 22.2% federal on the last $450 of the RMD. Depending on expectations for growth in the tIRA, plus the known RMD table, it would not be unreasonable to do some Roth conversions with amounts above the RMD.

At least until you get to ~$14,750 in conversions, above which you face ~$500 worth of a 49.95% rate, followed by ~$55 of the 22.2% rate, and then ~$7600 of a 40.7% rate. Probably not worth going there.

Apparently AZ does not tax SS, you get to deduct $7,383 for standard deduction and personal exemption from what it does tax, and you pay ~3% on whatever is left. Thus state tax differences probably don't amount to much.

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Re: Questions about RMDs

Post by wrongfunds » Sat May 19, 2018 6:59 pm

Assume that he does NOT need more than the RMD for living expenses. If so, do you think by doing RMD conversion now and paying taxes on it now would be better for him than just taking the RMD? For example, if he were to run the spreadsheet for next 10 years with some assumptions such as
- taking RMD (and optional extra) will drop down his account by that amount (or some fraction if we assume growth)

I am thinking that his total taxes for next 10 years without doing conversion would be LESS than if he were to do the extra conversions along the way. To put it another way, his full conversion total taxes would be higher than just letting it ride.

This assumes that he does NOT need more than RMD. I am also sort assuming that the RMD numbers are specifically designed by IRS to exhaust the account more or less in equal "spending real dollars". As the RMD percentage goes up, his account is also going down.

We need to ask OP if he would be very unhappy if his account just keeps on growing even after taking RMD and would he be too upset if the account becomes huge? I know, I know he *will* be upset at having to pay more taxes because of that!

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FiveK
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Re: Questions about RMDs

Post by FiveK » Sat May 19, 2018 7:10 pm

wrongfunds wrote:
Sat May 19, 2018 6:59 pm
Assume....
It's probably a close call, and the answer very much depends on assumptions, including
- rate of growth in the IRA
- life expectancy
- destination of estate funds and the marginal rates paid by heirs
- that the SS benefit taxation 50% and 85% breakpoints remain un-indexed to inflation.
- etc. (see also Spirit Rider's post - first reply in the thread).

Almost there
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Re: Questions about RMDs

Post by Almost there » Sat Jun 02, 2018 4:41 pm

Thank you very much to everyone who added to this post.

Wrongfunds wrote:
We need to ask OP if he would be very unhappy if his account just keeps on growing even after taking RMD and would he be too upset if the account becomes huge? I know, I know he *will* be upset at having to pay more taxes because of that!
What a terrible thing to happen that even though I transferred my RMD to a cash account, my IRA at the end of 2018 is higher than at the end of 2017. (I guess I will have to come back here and give a report either way.) I guess all my saving for the past 30+ years are paying off.

At this point, I have decided NOT to do a TIRA to ROTH transfer. However, since I found a charity 501(c)(3) which benefits children, I might end up doing a QCD.

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Re: Questions about RMDs

Post by GAAP » Sun Jun 03, 2018 11:56 am

Almost there wrote:
Sat Jun 02, 2018 4:41 pm

What a terrible thing to happen that even though I transferred my RMD to a cash account, my IRA at the end of 2018 is higher than at the end of 2017. (I guess I will have to come back here and give a report either way.) I guess all my saving for the past 30+ years are paying off.
Start value - withdrawals + returns = next year start value.

As long as your real returns exceed the withdrawal rate, the account will grow in real terms. If you want to plan on only taking RMDs, then you can use the tax tables to see at what age your RMD percentage exceeds your expected real portfolio returns (give or take a couple of years). Timing of the RMDs and earnings will matter more as you get closer to parity.

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Re: Questions about RMDs

Post by Almost there » Mon Jun 04, 2018 8:01 pm

Thank you GAAP, who wrote:
As long as your real returns exceed the withdrawal rate, the account will grow in real terms. If you want to plan on only taking RMDs, then you can use the tax tables to see at what age your RMD percentage exceeds your expected real portfolio returns (give or take a couple of years). Timing of the RMDs and earnings will matter more as you get closer to parity.
Which tax tables do you mean?

Almost there

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Re: Questions about RMDs

Post by GAAP » Thu Jun 07, 2018 4:41 pm

Almost there wrote:
Mon Jun 04, 2018 8:01 pm
Thank you GAAP, who wrote:
As long as your real returns exceed the withdrawal rate, the account will grow in real terms. If you want to plan on only taking RMDs, then you can use the tax tables to see at what age your RMD percentage exceeds your expected real portfolio returns (give or take a couple of years). Timing of the RMDs and earnings will matter more as you get closer to parity.
Which tax tables do you mean?

Almost there
The RMD tables from the IRS will tell you something like this:

Code: Select all

Age	Life
	expectancy
70	27.4
71	26.5
72	25.6
73	24.7
74	23.8
75	22.9
76	22
77	21.2
78	20.3
79	19.5
80	18.7
That translates to:

Code: Select all

Age	Life		Withdrawal
	Expectancy	Rate
70	27.4		3.65%
71	26.5		3.77%
72	25.6		3.91%
73	24.7		4.05%
74	23.8		4.20%
75	22.9		4.37%
76	22		4.55%
77	21.2		4.72%
78	20.3		4.93%
79	19.5		5.13%
80	18.7		5.35%
For example, at age 80, you have to withdraw 1/18.7 of your IRA -- 5.35%

For more details: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Almost there
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Re: Questions about RMDs

Post by Almost there » Thu Jun 07, 2018 5:31 pm

Oh thank you. This is very helpful.

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