If RMD are large should you still defer into 401k

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antiqueman
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If RMD are large should you still defer into 401k

Post by antiqueman » Sat May 19, 2018 7:18 am

There is currently an ongoing thread about converting to Roth or not and how the size of ones RMD's affect if one show convert to a Roth.

That thread prompted me to run anticipated RMD for my self and wife.

The RMD calculator indicates that my first RMD will be over 50k. My wife' will be about 30k. I will be 70.5 in 6 years.

I am wondering since my projected RMD will be large ( at least to me) if I should stop my 401k contributions. I have been maxing my 401k for years. I realize I get the tax break now if I continue to max the 401k, but if I continue to do so that will just increase my RMD.

I don't know when I will retire. In my job I could work another 10 years probably.

Thanks.

JoeRetire
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Re: If RMD are large should you still defer into 401k

Post by JoeRetire » Sat May 19, 2018 7:22 am

antiqueman wrote:
Sat May 19, 2018 7:18 am
I am wondering since my projected RMD will be large ( at least to me) if I should stop my 401k contributions. I have been maxing my 401k for years. I realize I get the tax break now if I continue to max the 401k, but if I continue to do so that will just increase my RMD.
How much is the 401k tax break worth to you?

retiredjg
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Re: If RMD are large should you still defer into 401k

Post by retiredjg » Sat May 19, 2018 8:08 am

How much of the RMD do you expect to use to live on? If you need lot of the RMD, it doesn't really matter how large it is, or so it seems to me.

If there are pensions involved or other reasons you don't need much of the RMD, you probably need to retire now if your goal is financial optimization or paying the least tax possible for the rest of your life. If you are not interested in retiring now, then maybe you would rather continue working than cut your taxes now or in the future. If that is the case, I don't think it matters much if you continue to contribute to the 401k or not.

If you stop contributing, you could pay more taxes now but leave money in taxable, rather than 401k/IRA, to your heirs. If you don't stop contributing now, you will pay more taxes now, but have a smaller RMD in the future.

dharrythomas
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Re: If RMD are large should you still defer into 401k

Post by dharrythomas » Sat May 19, 2018 9:33 am

You could consider shifting your deferrals to a Roth account if available. Then before retirement, roll it to a Roth IRA and avoid MRDs. You give up the current tax deduction but save later.

Katietsu
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Re: If RMD are large should you still defer into 401k

Post by Katietsu » Sat May 19, 2018 9:46 am

dharrythomas wrote:
Sat May 19, 2018 9:33 am
You could consider shifting your deferrals to a Roth account if available. Then before retirement, roll it to a Roth IRA and avoid MRDs. You give up the current tax deduction but save later.
Agreed that using a Roth 401k seems like it would be preferable to stopping contributions.

Also note that there are no RMD’s at 70.5 from a particular 401k if you are still working for that employer.

If your current employer does not have a Roth version, you could keep contributing to the tax deferred version. But then balance that out by converting any traditional IRA’s to Roth in an equal amount.

wrongfunds
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Re: If RMD are large should you still defer into 401k

Post by wrongfunds » Sat May 19, 2018 10:03 am

You could also check if your current employer's 401K plan takes your previous 401K (direct rollover IRA) money back in.

btenny
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Re: If RMD are large should you still defer into 401k

Post by btenny » Sat May 19, 2018 10:06 am

You should probably put current savings in your taxable accounts instead of your 401K at your age. Then in a few years you can withdraw that money tax free and spend it and not raise your taxable income. The issue is when you start RMDs you will have big taxes and maybe extra Medicare taxes as well due to larger income. So the sum of your RMDs and this money is not as large if it is withdrawn from a taxable account. So lower net taxes.

You should seriously investigate doing some Roth conversions and tax planning for the future. Maybe convert some of your IRA and 401K money now before you start RMDs. I suspect you are looking at a tax time bomb when you and your wife hit 70.5 and start RMDs. Add social security for two to $80K in RMDs and you are at $130K in income. Then add in some other pension and investments income and you are probably at $170K or more. This puts you into the big leagues of high cost Medicare and high federal and state taxes with no where to hide.

Good Luck.

wrongfunds
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Re: If RMD are large should you still defer into 401k

Post by wrongfunds » Sat May 19, 2018 11:25 am

Can you run the actual numbers to find out the cost of NOT deferring into 401K vs the amount of taxes on the RMD later? I mean you will be paying taxes either today or later. There is no avoiding them unless you stop working right now and get your income to zero. If you are highly paid, the cost of NOT deferring is going to be high. I have no idea of the RMD and the resultant tax bite would be *higher* than your current number.

You have to run the numbers and make certain assumptions about future. But you will never *know for certain*.

JW-Retired
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Re: If RMD are large should you still defer into 401k

Post by JW-Retired » Sat May 19, 2018 12:32 pm

antiqueman wrote:
Sat May 19, 2018 7:18 am
The RMD calculator indicates that my first RMD will be over 50k. My wife' will be about 30k. I will be 70.5 in 6 years.
...............
I am wondering since my projected RMD will be large ( at least to me) if I should stop my 401k contributions.
.................
I don't know when I will retire. In my job I could work another 10 years probably.
Impossible for us to say without knowing your marginal tax rate now versus what it will be when you are fully retired and taking RMDs.

What's your guesstimate your retirement income will be comprised of? RMD=$50k+$30k?, Social security = ??, other = ??. If we knew that we could figure out the marginal tax rate on your RMDs and you could compare it to the rate are paying now.

If you are going to be paying at a higher marginal rate on your deferred income when retired, then you are better off to stop deferring.
JW
Retired at Last

wrongfunds
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Re: If RMD are large should you still defer into 401k

Post by wrongfunds » Sat May 19, 2018 1:00 pm

Does the RMD calculator use your current balance to determine RMD or is it guessing your balance at the end of 6 years and computing based upon the future balance? What happens if your future balance tanks or does not grow as much as expected because of the market uncertainty?

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Watty
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Re: If RMD are large should you still defer into 401k

Post by Watty » Sat May 19, 2018 11:15 pm

A huge factor could be the estate planning aspects of choosing to contribute to the 401k or not.

If you will be leaving the money to a charity or to someone that will likely be in a lower tax bracket that could favor putting more money into the 401k or not.

SGM
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Re: If RMD are large should you still defer into 401k

Post by SGM » Sun May 20, 2018 9:59 am

One thing that worked for my situation (working part time prior to retiring completely) was that I continued to make 401k contributions while at the same time I made Roth conversions. My tax deferred space remained the same while my Roth space increased and taxable account decreased in that particular year.

The longer term plan was to eventually convert all tax deferred accounts to Roth accounts while decreasing my taxable account. With stock market gains I ended up with a large amount in Roth accounts and a still larger amount in taxable accounts. I will have no RMDs in my future.

Up until 2010 I only had tax deferred and taxable accounts. When the law changed to allow me to make Roth conversions, I calculated that I would have large withdrawals at age 70 1/2 which on top of delayed SS and other income had the potential to raise my tax rates considerably. Also when one of us passes the other would be taxed at a higher rate.

One must run the numbers as each situation is different.

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CABob
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Re: If RMD are large should you still defer into 401k

Post by CABob » Sun May 20, 2018 6:46 pm

antiqueman wrote:
Sat May 19, 2018 7:18 am
I am wondering since my projected RMD will be large ( at least to me) if I should stop my 401k contributions. I have been maxing my 401k for years. I realize I get the tax break now if I continue to max the 401k, but if I continue to do so that will just increase my RMD
And the down side to a higher 401k balance is ???? OK I know the RMD (or any other withdrawal) will be taxed but that to me is not a problem.
Bob

RadAudit
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Re: If RMD are large should you still defer into 401k

Post by RadAudit » Sun May 20, 2018 8:08 pm

My RMDs are large to me, too. ( I was more than a little too late to the Roth conversion idea. :oops: ) My income in retirement is higher than when I was employed.

However, no matter how much the RMD is in any one year, they don't take it all in taxes, yet. And I continue to believe a larger tax deferred portfolio is preferable to a smaller portfolio. I'd keep contributing.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

Bacchus01
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Re: If RMD are large should you still defer into 401k

Post by Bacchus01 » Mon May 21, 2018 5:15 pm

RMDs sneak up in a lot of people. I don’t have exact calc in front of me, but we’re 45 with about $1M in 401k balances. With continued contributions and growth through age 65 and no withdraws before 70, the RMD is huge!

WhiteMaxima
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Re: If RMD are large should you still defer into 401k

Post by WhiteMaxima » Mon May 21, 2018 6:07 pm

max 401k pre-ax to your next tax bracket if it is not 35%. If you are into higher tax bracket, then max pre-tax. If you projected RMD is too big, good news for you, you can retire earlier and using the gap years to do Roth conversion till you start to withdraw SS and pension. You can also do a one time 100k annuity purchase using your 401k. That will reduce your RMD while provide lifetime income.

delamer
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Re: If RMD are large should you still defer into 401k

Post by delamer » Mon May 21, 2018 6:16 pm

1. Don’t give up any current employer match for your 401(k).

2. You can certainly withdraw money from your 401(k)s once retired but prior to needing to take RMDs. That will reduce your RMDs.

3. You are 64 now and plan to continue working for another 10 years? To each their own, but why not retire now?

ralph124cf
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Re: If RMD are large should you still defer into 401k

Post by ralph124cf » Mon May 21, 2018 7:47 pm

Tell us when you (and your spouse) plan to die. That makes the calculations much easier.

Ralph

bayview
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Re: If RMD are large should you still defer into 401k

Post by bayview » Mon May 21, 2018 7:50 pm

It’s not just the size of the RMDs. It’s also that you are required to take them at a time that might screw up your tax planning, affect taxation of SS for those of us without high retirement income, etc.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

jdb
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Re: If RMD are large should you still defer into 401k

Post by jdb » Tue May 22, 2018 8:26 am

WhiteMaxima wrote:
Mon May 21, 2018 6:07 pm
max 401k pre-ax to your next tax bracket if it is not 35%. If you are into higher tax bracket, then max pre-tax. If you projected RMD is too big, good news for you, you can retire earlier and using the gap years to do Roth conversion till you start to withdraw SS and pension. You can also do a one time 100k annuity purchase using your 401k. That will reduce your RMD while provide lifetime income.
Could you please explain the one time annuity purchase? Is this special to a 401(k)? Thanks.

WhiteMaxima
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Re: If RMD are large should you still defer into 401k

Post by WhiteMaxima » Tue May 22, 2018 11:06 am

jdb wrote:
Tue May 22, 2018 8:26 am
WhiteMaxima wrote:
Mon May 21, 2018 6:07 pm
max 401k pre-ax to your next tax bracket if it is not 35%. If you are into higher tax bracket, then max pre-tax. If you projected RMD is too big, good news for you, you can retire earlier and using the gap years to do Roth conversion till you start to withdraw SS and pension. You can also do a one time 100k annuity purchase using your 401k. That will reduce your RMD while provide lifetime income.
Could you please explain the one time annuity purchase? Is this special to a 401(k)? Thanks.
I believe you can purchase one-time annuity with your pre-tax money in your 401k to reduce your total balance. Thus reduce your RMD. It is capped at 100k per person. Esp you don't have traditional pension so that give your lifetime payment. Talk to your 401k administrator for details. If your company allows aft-tax 401k, you should do. The after-tax portion is allowed to rollover to Roth. That will reduce your future RMD.

randomguy
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Re: If RMD are large should you still defer into 401k

Post by randomguy » Tue May 22, 2018 3:06 pm

Bacchus01 wrote:
Mon May 21, 2018 5:15 pm
RMDs sneak up in a lot of people. I don’t have exact calc in front of me, but we’re 45 with about $1M in 401k balances. With continued contributions and growth through age 65 and no withdraws before 70, the RMD is huge!
Depends on what you are making. In 25 years you will be in the 3-5 million real range (hand wave about returns, contributions, AA, retirement age,...). That is 120-200k of RMDs. If you are making 100k/year now, that is huge. If you are making 300k/year now, those same RMDs aren't exactly huge.

And of course the questions is why would you do no withdrawals from 65-70? You could be sucking out 165k+ at less than 22%. 300k+ at 24%.

You would need to sit down with your exact assumptions to figure out what the right move for you is. You could be in the case where ROTHs make sense. Or you could still be coming out well ahead with deferred.

WhiteMaxima
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Re: If RMD are large should you still defer into 401k

Post by WhiteMaxima » Tue May 22, 2018 3:12 pm

Aft-tax 401k, then roll into Roth. No RMD. Tax free growth.

mhalley
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Re: If RMD are large should you still defer into 401k

Post by mhalley » Tue May 22, 2018 4:03 pm

Another option might be to do a partial rollover into an spia.
https://www.whitecoatinvestor.com/indiv ... d-dilemma/

retiredjg
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Re: If RMD are large should you still defer into 401k

Post by retiredjg » Tue May 22, 2018 4:32 pm

WhiteMaxima wrote:
Tue May 22, 2018 11:06 am
jdb wrote:
Tue May 22, 2018 8:26 am
WhiteMaxima wrote:
Mon May 21, 2018 6:07 pm
max 401k pre-ax to your next tax bracket if it is not 35%. If you are into higher tax bracket, then max pre-tax. If you projected RMD is too big, good news for you, you can retire earlier and using the gap years to do Roth conversion till you start to withdraw SS and pension. You can also do a one time 100k annuity purchase using your 401k. That will reduce your RMD while provide lifetime income.
Could you please explain the one time annuity purchase? Is this special to a 401(k)? Thanks.
I believe you can purchase one-time annuity with your pre-tax money in your 401k to reduce your total balance. Thus reduce your RMD. It is capped at 100k per person.
This is not ringing any bells with me. It may be something that is specific to your plan WhiteMaxima and not available in all plans. Or it could be something I just don't know about. :happy

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Electron
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Re: If RMD are large should you still defer into 401k

Post by Electron » Tue May 22, 2018 4:42 pm

The one-time annuity may be a QLAC.

https://www.annuityfyi.com/longevity-an ... y-annuity/
Electron

randomguy
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Re: If RMD are large should you still defer into 401k

Post by randomguy » Tue May 22, 2018 5:01 pm

Electron wrote:
Tue May 22, 2018 4:42 pm
The one-time annuity may be a QLAC.

https://www.annuityfyi.com/longevity-an ... y-annuity/
Does that really save you much on taxes though? Sure your RMDs are lower until the QLAC kicks in but then you get some pretty large payouts. You would have to make a lot of assumptions to figure out which way results in more spendable money for you or your heirs.

aristotelian
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Re: If RMD are large should you still defer into 401k

Post by aristotelian » Tue May 22, 2018 5:10 pm

What is your current marginal tax bracket?

folkher0
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Re: If RMD are large should you still defer into 401k

Post by folkher0 » Tue May 22, 2018 5:49 pm

Bacchus01 wrote:
Mon May 21, 2018 5:15 pm
RMDs sneak up in a lot of people. I don’t have exact calc in front of me, but we’re 45 with about $1M in 401k balances. With continued contributions and growth through age 65 and no withdraws before 70, the RMD is huge!
One aspect of the RMD conversation that doesnt seem to get much attention is the effect of inflation. While In 25 years, RMDs may result in high taxes, each dollar that you pay in taxes in the future will be worth less then the dollars that you pay in taxes today.

To me, this suggests that anything I can do to lower my taxes today will probably ultimately benefit me in retirement.

There are of course other considerations (Medicare, Social Security) which may alter your tax burden. But in general I’d rather pay taxes later than now.

Bacchus01
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Re: If RMD are large should you still defer into 401k

Post by Bacchus01 » Tue May 22, 2018 6:06 pm

randomguy wrote:
Tue May 22, 2018 3:06 pm
Bacchus01 wrote:
Mon May 21, 2018 5:15 pm
RMDs sneak up in a lot of people. I don’t have exact calc in front of me, but we’re 45 with about $1M in 401k balances. With continued contributions and growth through age 65 and no withdraws before 70, the RMD is huge!
Depends on what you are making. In 25 years you will be in the 3-5 million real range (hand wave about returns, contributions, AA, retirement age,...). That is 120-200k of RMDs. If you are making 100k/year now, that is huge. If you are making 300k/year now, those same RMDs aren't exactly huge.

And of course the questions is why would you do no withdrawals from 65-70? You could be sucking out 165k+ at less than 22%. 300k+ at 24%.

You would need to sit down with your exact assumptions to figure out what the right move for you is. You could be in the case where ROTHs make sense. Or you could still be coming out well ahead with deferred.
I have done exactly that and the RMD assumption on top of other sources of income like pensions and SS makes for a very high number. And taking $300k a year at 65-70 also assumes no other income. For us, we will have $100k in pension and SS income compounded by my wife being 5 years older.

My plan is to retire earlier than 65 and avoid a lot of this, but if plan was to work to 65, the tax benefits start to run out before 65.

Bacchus01
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Re: If RMD are large should you still defer into 401k

Post by Bacchus01 » Tue May 22, 2018 6:08 pm

folkher0 wrote:
Tue May 22, 2018 5:49 pm
Bacchus01 wrote:
Mon May 21, 2018 5:15 pm
RMDs sneak up in a lot of people. I don’t have exact calc in front of me, but we’re 45 with about $1M in 401k balances. With continued contributions and growth through age 65 and no withdraws before 70, the RMD is huge!
One aspect of the RMD conversation that doesnt seem to get much attention is the effect of inflation. While In 25 years, RMDs may result in high taxes, each dollar that you pay in taxes in the future will be worth less then the dollars that you pay in taxes today.

To me, this suggests that anything I can do to lower my taxes today will probably ultimately benefit me in retirement.

There are of course other considerations (Medicare, Social Security) which may alter your tax burden. But in general I’d rather pay taxes later than now.
I generally agree. I just wonder if I will agree when I run the calcs again in 10 years at 55. I might not.

jdb
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Re: If RMD are large should you still defer into 401k

Post by jdb » Tue May 22, 2018 6:39 pm

Not sure why anyone would object to large RMD. Sounds to me like a good situation. If don’t need the distribution or don’t want to pay any taxes on RMD do a QCD to local charity for the portion don’t need or don’t want to pay taxes on. That is what I plan to do in three months, and with an RMD approaching $90K I will be very popular amongst the local charities for many years. But they probably can make better use of the money than we can and certainly need it more. Good luck.

Beehave
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Re: If RMD are large should you still defer into 401k

Post by Beehave » Tue May 22, 2018 7:06 pm

Looks like you are satisfied with your 401k balances and do not "need" more. So from the perspective of retirement needs, future contributions are optional.

Given that, 1st consideration as mentioned in a response above is not to give up on any employer match. If employers are matching dollar for dollar or 50 cents on the dollar for either you or spouse, keep taking advantage at a minimum up to the matching amount.

Next issue: Do you have an emergency fund for the usual - - hot water heater replacement, roof repair, car repair, etc.? f not, start funding that.

Next issue: Do you have long-term care insurance? If not, have you self-insured or started self-insuring with an after-tax mix of cash/bonds/investments? Like the general emergency fund above, these funds are (in my opinion as much as possible post-tax or min-tax and generally liquid. They are there to cover any and all emergencies, especially any medical or life care expenses not covered by insurance OR to pay for possible insurance hikes etc. They can also supplement long-term care insurance in case needed. I prefer these to be independent of taxation for a variety of reasons, including possible future tax hikes and just minimum of hassle in time of duress. Post-tax (non-Roth) is diverse from Roth is diverse from pre-tax, and diversity is your friend if you have the means to achieve it and do it.

If you've covered all of these - - you have ample retirement funds, ample emergency funds, and your income and emergencies are covered, you have the luxury of going for black swan deflation and/or inflation protection. Here you can round up the usual suspects (I'd be more specific but I'm no expert and would welcome hearing anyone's suggestions) -- hard assets, inflation-protected bonds, etc.

Finally, and regarding some posts above - - some more general thoughts:
(a) DO NOT RETIRE JUST BECAUSE YOU CAN - - - especially not to stop working just for the purpose of minimizing your lifetime taxes. There is nothing right about that suggestion. If your work stimulates your mind, makes you feel productive and engaged, and does not interfere with your health, then be careful about giving it up. As for taxes, your 401k grew to its size because it was tax-deferred, so paying taxes on it is expected and reasonable. Of course, there's no harm in looking at brackets and trying to optimize for your particular circumstance, but do not let minimizing taxes become the be-all and end-all of your existence - - the tax issue should be tail, not dog.
(b) Enjoy your wealth while you can. Whatever that means for you. And may it be a long time!!!

Best wishes.

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