Predicted RMDs Have Caught Me By Surprise

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LMK5
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Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Tue Mar 12, 2019 1:19 pm

I will be turning 58 in June, and would like to retire at 62. I've recently delved into RMD calculators and I was rather shocked to see that my initial RMD will be about 120k. My wife is 10 years younger than I am and I did input that information into the calculator.

I am currently putting the maximum allowed into my pre-tax 401k, along with maxing out my Roth IRA contributions. Unfortunately, because my wife will still be working when I retire I don't feel I will drop that much lower in my tax bracket in retirement, if at all, for at least the first 5 years of retirement.
Looking at possible strategies going forward, should I:

1) Stop putting money into the pre-tax 401k and contribute to the Roth 401k instead?
2) Start converting traditional IRA money to my Roth IRA each year, being careful not to jump tax brackets?
3) Do nothing differently, and just see what happens when the RMDs begin? Will I get killed on SS and Medicare surcharges?
4) Is it OK for my wife, being 10 years younger, to continue putting money into a pre-tax 401k since her RMDs would be 10 years later and also lower because of a smaller investment balance, or should she also use predominantly after-tax vehicles?

Thanks for any guidance you can provide.

Thesaints
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Re: Predicted RMDs Have Caught Me By Surprise

Post by Thesaints » Tue Mar 12, 2019 1:26 pm

Don't your RMD's start 12 years from now ?
In order to estimate that 120k figure, you must have estimated your portfolio value in 2031. If you can do such a thing reliably, don't retire; you have a bright future on Wall St.

rkhusky
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Re: Predicted RMDs Have Caught Me By Surprise

Post by rkhusky » Tue Mar 12, 2019 1:46 pm

So, you have about $3.3M in tax deferred?

What is your marginal tax rate? And what do you expect your marginal tax rate will be at age 70.5, with RMD and SS?

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Ketawa
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Re: Predicted RMDs Have Caught Me By Surprise

Post by Ketawa » Tue Mar 12, 2019 1:48 pm

Thesaints wrote:
Tue Mar 12, 2019 1:26 pm
Don't your RMD's start 12 years from now ?
In order to estimate that 120k figure, you must have estimated your portfolio value in 2031. If you can do such a thing reliably, don't retire; you have a bright future on Wall St.
All investment decisions like Roth vs Traditional have to be made with assumptions or inputs about future outcomes, whether it be tax rates, returns, career decisions like early retirement, etc. Using a historical rate of return applied over 12 years to minimum expected taxes is a reasonable alternative to sticking your head in the sand.
LMK5 wrote:
Tue Mar 12, 2019 1:19 pm
I will be turning 58 in June, and would like to retire at 62. I've recently delved into RMD calculators and I was rather shocked to see that my initial RMD will be about 120k. My wife is 10 years younger than I am and I did input that information into the calculator.

I am currently putting the maximum allowed into my pre-tax 401k, along with maxing out my Roth IRA contributions. Unfortunately, because my wife will still be working when I retire I don't feel I will drop that much lower in my tax bracket in retirement, if at all, for at least the first 5 years of retirement.
Looking at possible strategies going forward, should I:

1) Stop putting money into the pre-tax 401k and contribute to the Roth 401k instead?
2) Start converting traditional IRA money to my Roth IRA each year, being careful not to jump tax brackets?
3) Do nothing differently, and just see what happens when the RMDs begin? Will I get killed on SS and Medicare surcharges?
4) Is it OK for my wife, being 10 years younger, to continue putting money into a pre-tax 401k since her RMDs would be 10 years later and also lower because of a smaller investment balance, or should she also use predominantly after-tax vehicles?

Thanks for any guidance you can provide.
By my back of the envelope estimate, you plan on having $3.3M in your Traditional IRA when RMDs hit.

Not possible to answer without knowing more about your current incomes and marginal tax rate. Regardless, I would not discount the opportunity to convert Traditional to Roth for 8 years. Your taxable income will go down when you retire, and you will probably have plenty of opportunities to convert at tax rates lower than your current top marginal rate. Even when RMDs hit, $120K is still only near the bottom of the 22% or 25% federal tax bracket (if tax rates revert as would happen without a change to current law), which will probably be close to $100K for MJF in 12 years after inflation. You might even be in the 12% or 15% bracket after taking the standard deduction.

Assuming you are filing taxes MFJ, your wife will have basically the same decision on the margin as you for Roth vs Traditional. I am not an expert on RMDs though.

With $120K in income, SS benefits will be fully taxable, so that does not have any impact on the choice you have to make today on the margin.

My guess for your questions is that you should stick with Traditional and shouldn't convert anything now. Start converting after you retire. After doing the analysis, you and your wife probably have the same answer if you are MFJ.

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celia
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Re: Predicted RMDs Have Caught Me By Surprise

Post by celia » Tue Mar 12, 2019 2:06 pm

I would do 1) and/or 2).

4) is irrelevant as long as you are both alive since taxes are based on your combined incomes, as long as you file MFJ.

3) Doing nothing differently will "surprise" you at age 70.5, especially if the markets do well between now and then. But you already know that. If you ignore what you now realize and do nothing about it, you will have to accept the consequences.

Another option is to have your wife stop working when you do. That may limit her SS but if your FRA amount is more or similar to hers, that won't matter much in the long term (after one of you dies since the survivor will get the bigger SS). That will give you many years to convert a lot. But then you may have to figure out where to get medical insurance. I also assume you will wait until YOUR age 70 to start SS.

What you really want to plan for is her outliving you by up to 40 years. This should be a joint decision. The worst financial situation I can think of is you dying right when you start RMDs. Yes, she can roll your pre-tax amount into a traditional IRA. But her RMDs when SHE TURNS 70.5 will be more than $120K (maybe twice as much) AND she will have to file as Single. The space in each tax bracket for Singles is half of what it is for MFJ, so her tax bracket will be very, very high.
Last edited by celia on Tue Mar 12, 2019 2:22 pm, edited 1 time in total.
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Re: Predicted RMDs Have Caught Me By Surprise

Post by Thesaints » Tue Mar 12, 2019 2:07 pm

Ketawa wrote:
Tue Mar 12, 2019 1:48 pm
All investment decisions like Roth vs Traditional have to be made with assumptions or inputs about future outcomes, whether it be tax rates, returns, career decisions like early retirement, etc. Using a historical rate of return applied over 12 years to minimum expected taxes is a reasonable alternative to sticking your head in the sand.
Picking a single outcome of a dice roll IS sticking the head in the sand.
The OP doesn't really know how much his first RMD is going to be. Certainly, a single point value is the wrong way to engage the issue, since it almost devoid of any information.

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TomatoTomahto
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Re: Predicted RMDs Have Caught Me By Surprise

Post by TomatoTomahto » Tue Mar 12, 2019 2:13 pm

I did the math, came to a similar conclusion, and did option #1.

We don’t expect to be at a lower tax rate in retirement (and if so, not much lower), anticipate the possibility of tax rate increases, and expect that a Roth 401k will be inherited by our heirs.
Last edited by TomatoTomahto on Tue Mar 12, 2019 2:14 pm, edited 1 time in total.
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Re: Predicted RMDs Have Caught Me By Surprise

Post by carol-brennan » Tue Mar 12, 2019 2:14 pm

LMK5 wrote:
Tue Mar 12, 2019 1:19 pm
I will be turning 58 in June, and would like to retire at 62. I've recently delved into RMD calculators and I was rather shocked to see that my initial RMD will be about 120k. My wife is 10 years younger than I am and I did input that information into the calculator.

I am currently putting the maximum allowed into my pre-tax 401k, along with maxing out my Roth IRA contributions. Unfortunately, because my wife will still be working when I retire I don't feel I will drop that much lower in my tax bracket in retirement, if at all, for at least the first 5 years of retirement.
Looking at possible strategies going forward, should I:

1) Stop putting money into the pre-tax 401k and contribute to the Roth 401k instead?
2) Start converting traditional IRA money to my Roth IRA each year, being careful not to jump tax brackets?
3) Do nothing differently, and just see what happens when the RMDs begin? Will I get killed on SS and Medicare surcharges?
4) Is it OK for my wife, being 10 years younger, to continue putting money into a pre-tax 401k since her RMDs would be 10 years later and also lower because of a smaller investment balance, or should she also use predominantly after-tax vehicles?

Thanks for any guidance you can provide.
Rejigger your planning so that you start drawing money from the 401-kay at 62. Spend down the balance so that your RMD at 70.5 is not so high. Play with all money sources to lower overall tax hit over the years.

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LMK5
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Re: Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Tue Mar 12, 2019 3:27 pm

Thanks for all the answers. After reading through them, not surprisingly, there is no obvious answer/solution. After reading Ed Slott's book, it seems he is hell bent on converting all traditional pre-tax accounts to Roth as quickly as possible. He seems to know what he's talking about so it got my attention.

Celia, can you tell me what you mean when you say "a dollar in a taxable account is worth more than a dollar in a tax-deferred account"?

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Re: Predicted RMDs Have Caught Me By Surprise

Post by megabad » Tue Mar 12, 2019 3:30 pm

rkhusky wrote:
Tue Mar 12, 2019 1:46 pm
What is your marginal tax rate? And what do you expect your marginal tax rate will be at age 70.5, with RMD and SS?
+1. The answer to the marginal rate question (current rate and what you predict it to be in future) should tell you what you should do. I think IRMAA starts at over 214k so also consider that in your "marginal rate". Good job on saving so much for retirement.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by Gill » Tue Mar 12, 2019 3:36 pm

LMK5 wrote:
Tue Mar 12, 2019 3:27 pm
Celia, can you tell me what you mean when you say "a dollar in a taxable account is worth more than a dollar in a tax-deferred account"?
Not, Celia but, quite simply, the dollar in the tax deferred account is subject to taxation whereas the dollar in a taxable account can be utilized without paying tax.
Gill
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Re: Predicted RMDs Have Caught Me By Surprise

Post by cheese_breath » Tue Mar 12, 2019 3:38 pm

Thesaints wrote:
Tue Mar 12, 2019 1:26 pm
Don't your RMD's start 12 years from now ?
In order to estimate that 120k figure, you must have estimated your portfolio value in 2031. If you can do such a thing reliably, don't retire; you have a bright future on Wall St.
And if you can't predict it reliably you might still have a bright future on CNBC. :D
The surest way to know the future is when it becomes the past.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by TimeRunner » Tue Mar 12, 2019 3:48 pm

Quick mention to check out I-ORP tool: https://i-orp.com then select the Extended Tab. (Extended tab URLs subject to change, so best to navigate from home page.)
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Re: Predicted RMDs Have Caught Me By Surprise

Post by retiredjg » Tue Mar 12, 2019 3:51 pm

I will be turning 58 in June, and would like to retire at 62. I've recently delved into RMD calculators and I was rather shocked to see that my initial RMD will be about 120k.

It appears you expect your tax-deferred account to be about $3 million at age 70.5. Is that correct? If not, you are working on the wrong assumptions and need to start over and find your mistake.

It is also important how you arrived at the $3 million. How did you get that number?

You will have several years between age 62 and RMDs to do Roth conversions. That is a lot to convert, but I would leave at least $$300 - $500k in tIRA (not convert it to Roth).

If you try to convert $2.5 million in that 8 years or so, your tax bracket is going to be pretty high for those 8 years.

How high is your tax bracket now? That's really the crux of the whole matter.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by Stinky » Tue Mar 12, 2019 3:53 pm

TomatoTomahto wrote:
Tue Mar 12, 2019 2:13 pm
I did the math, came to a similar conclusion, and did option #1.

We don’t expect to be at a lower tax rate in retirement (and if so, not much lower), anticipate the possibility of tax rate increases, and expect that a Roth 401k will be inherited by our heirs.
Ditto. That’s our situation (and decision) exactly.
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Re: Predicted RMDs Have Caught Me By Surprise

Post by sergeant » Tue Mar 12, 2019 3:57 pm

I'm a bit younger than you and DW is a bit older than your wife but our numbers are similar. The driver for me to do something is that I'm predicting my wife to outlive me by a substantial amount of time and her future tax situation as a single filer.

I started converting to Roth last year and have a plan to continue conversions over the next several years. This is my wife's last year working and contributing to tax deferred. She retires in the fall and we will start conversions in her account as well when she retires.

So far my tax deferred accounts have increased in value well over the amount of my conversions. I'm not complaining. Neither of us are SS eligible so SS taxation isn't a consideration.
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Re: Predicted RMDs Have Caught Me By Surprise

Post by celia » Tue Mar 12, 2019 4:11 pm

Gill wrote:
Tue Mar 12, 2019 3:36 pm
LMK5 wrote:
Tue Mar 12, 2019 3:27 pm
Celia, can you tell me what you mean when you say "a dollar in a taxable account is worth more than a dollar in a tax-deferred account"?
Not, Celia but, quite simply, the dollar in the tax deferred account is subject to taxation whereas the dollar in a taxable account can be utilized without paying tax.
Gill
Every dollar in tax deferred (including the contribution) will be taxed as ordinary income before it can be spent.
The dollar in taxable may be subject to capital gains/dividends being taxed before it can be spent.
Roth dollars, obviously, are not subject to taxation once the account has been open 5 years and the account owner is over 59.5.
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.

quantAndHold
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Re: Predicted RMDs Have Caught Me By Surprise

Post by quantAndHold » Tue Mar 12, 2019 4:14 pm

In a similar situation, except I’m the younger one. The answer isn’t either/or, but probably a combination of things. I assume you’re using the correct divisor to calculate your projected RMD, that uses both you and your wife’s ages?

Depending on your tax bracket now, Roth 401k is probably a good idea. As are Roth conversions between now and age 70, and spending down some of the 401k before 70. You don’t have to convert everything you have, but if you even knock it down by half, you’ll be better off. I have been working on an optimizer that is specifically focused on optimizing Roth conversions and retirement spending for 401k early retirees. It’s not ready for prime time yet. In the meantime, the extended version of i-orp will mostly answer the “how much to convert/spend” question.

One thing to pay attention to is your wife’s situation. You can’t predict the future, but since she’s significantly younger, she is likely to outlive you, inherit your IRA/401k, and be taking RMD’s at the single rate. For my wife and I, we’re in pretty good shape for now (I’m 55, she’s 71), but if we don’t get some of this IRA money shifted/spent by the time I turn 70, I’m going to be paying some serious taxes.

janezoey
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Re: Predicted RMDs Have Caught Me By Surprise

Post by janezoey » Tue Mar 12, 2019 4:14 pm

I can't answer your specific question, but I would point out that current federal taxes are historically low. The current tax brackets will expire in 2025, and we don't know if Congress will keep them. Just something else to consider.

I know for my spouse and me in our mid-30s, he has a 401K Roth option *and* a generous pension. So we will likely start directing savings to the Roth 401K until 2025 and then see if the brackets change again. I know if we keep saving at our rate, we'll have very high RMDs too.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by SGM » Tue Mar 12, 2019 4:40 pm

I was surprised by predicted RMDs as well. I began converting in 2010 when the law removed income restrictions for conversions. I didn't have a Roth 401k option so I continued socking away in my traditional 401k and converting tIRAs at the same time. We have found that so far we are still in a rather high income tax bracket in retirement. After the conversions and paying the taxes out of taxable our portfolios continued to grow considerably. Probably we will leave the Roth as a legacy. The consideration that one of us would have to pay taxes as a single some day was important in the calculation.

This year would be my first RMD if I hadn't converted. Delayed SS and other income streams take care of our needs. I wouldn't need those RMDs and would be paying more taxes for 2019 and increasing my taxable portfolio. My IRMAA costs would be higher yet. I am glad we did the conversions over a period when we had a little lower income. Taxes are scheduled to go up in 2025 too. We have had good luck and are grateful every day.

elainet7
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Re: Predicted RMDs Have Caught Me By Surprise

Post by elainet7 » Tue Mar 12, 2019 4:45 pm

do some partial roth conversions
USE the Schwab Roth Ira conversion calculator
you will pay the taxes and live quite comfortably
Move to a tax free state like florida

elainet7
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Re: Predicted RMDs Have Caught Me By Surprise

Post by elainet7 » Tue Mar 12, 2019 4:48 pm

you won the game, STOP playing preserve the capital
read about the marginal utility of wealth(swedroe)

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Re: Predicted RMDs Have Caught Me By Surprise

Post by cherijoh » Tue Mar 12, 2019 4:59 pm

LMK5 wrote:
Tue Mar 12, 2019 1:19 pm
I will be turning 58 in June, and would like to retire at 62. I've recently delved into RMD calculators and I was rather shocked to see that my initial RMD will be about 120k. My wife is 10 years younger than I am and I did input that information into the calculator.

I am currently putting the maximum allowed into my pre-tax 401k, along with maxing out my Roth IRA contributions. Unfortunately, because my wife will still be working when I retire I don't feel I will drop that much lower in my tax bracket in retirement, if at all, for at least the first 5 years of retirement.
Looking at possible strategies going forward, should I:

1) Stop putting money into the pre-tax 401k and contribute to the Roth 401k instead?
2) Start converting traditional IRA money to my Roth IRA each year, being careful not to jump tax brackets?
3) Do nothing differently, and just see what happens when the RMDs begin? Will I get killed on SS and Medicare surcharges?
4) Is it OK for my wife, being 10 years younger, to continue putting money into a pre-tax 401k since her RMDs would be 10 years later and also lower because of a smaller investment balance, or should she also use predominantly after-tax vehicles?

Thanks for any guidance you can provide.
I retired early last year at 59. I debated about making 2018 contributions to my trad 401k, but then decided to go all in and maxed the 401k and Roth IRA before retirement. I figured that would allow me to decide on the timing of any Roth conversions. (In additional to the alternative option of taxable investing, I could have contributed to a Roth 401k).

After officially retiring, I then did several Roth conversions throughout the rest of the year. I actually did more conversions than I had originally planned because of the stock market reversal in December. As of today's closing price, my five 2018 conversions of Total stock market index are up in my Roth by 2.5 - 16.5% over their respective conversion prices. So I wouldn't discount the possibility of making opportunistic Roth conversions if the stock market has a sizable correction - even if you aren't in a lower tax bracket. But I would only do so if the taxes could be paid without taking a larger distribution from the IRA.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by sawdust60 » Tue Mar 12, 2019 7:41 pm

TimeRunner wrote:
Tue Mar 12, 2019 3:48 pm
Quick mention to check out I-ORP tool: https://i-orp.com then select the Extended Tab. (Extended tab URLs subject to change, so best to navigate from home page.)
+1

Perhaps try this strategy:
Wouldn't pretax contributions enable larger Roth conversions, perhaps to top of 24% (from husband's IRA) ?
Age 63+, you will incur IRMAA, so you'll want to fill up the brackets.
Age 73+, IRMAA will double (2 people), and perhaps you will have converted enough to stay below IRMAA.

You might find RPM useful, as you evaluate with varying levels of Roth conversions, investment returns, etc. Retiree Portfolio Model

And, evaluate your retirement plans, etc. It seems your wife could retire sooner.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by ralph124cf » Wed Mar 13, 2019 6:30 am

LMK5 wrote:
Tue Mar 12, 2019 3:27 pm
Thanks for all the answers. After reading through them, not surprisingly, there is no obvious answer/solution. After reading Ed Slott's book, it seems he is hell bent on converting all traditional pre-tax accounts to Roth as quickly as possible. He seems to know what he's talking about so it got my attention.

Celia, can you tell me what you mean when you say "a dollar in a taxable account is worth more than a dollar in a tax-deferred account"?
Under certain circumstances, tax deferred money MAY be withdrawn free of federal income tax.

This can occur if you have large medical expenses such as LTC. The medical expenses offset the withdrawal income resulting in no federal income tax, although some states will still tax you on the withdrawals.

Qualified Charitable Contributions can also be made directly from tax deferred accounts without counting as income. This is much more tax friendly than withdrawing the money and then donating it.

For these reasons I recommend NOT converting ALL tax deferred money to ROTH. How much to leave in deferred? That depends on how long you plan to live, how long you plan to spend in a nursing home, and what future tax rates will be.

The one data point that we do have is that for now, the income tax rate for MFJ is the lowest that it has been since World War II, at least for taxable income below $400K.

Ralph

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Re: Predicted RMDs Have Caught Me By Surprise

Post by Strayshot » Wed Mar 13, 2019 7:51 am

If you think you need to continue saving, Roth conversions are the obvious answer.

You may want to ask a different question, which is “what do I want to do with this money and what is its purpose”. This means understanding your spending/budget, retirement plans, etc. it seems that your wife has additional savings that aren’t included in these numbers.

My observation of friends and family older than I am is that 60-70 is a timeframe where mobility and other health issues can come strongly into the picture. Many of those folks also won the retirement game, but due to health or mobility issues the option space is 1) give more money away (or leave more inheritance) or 2) buy “stuff”. Those who opt to buy stuff mostly become hoarders (a family friend has not one but 2 unopened dyson vacuums purchased from one of those TV-based sales shows).

You may want to think about spending that money sooner rather than later and really having a good time in your early 60s, especially while you and your wife are both equally mobile. Travel! That is my .02

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Re: Predicted RMDs Have Caught Me By Surprise

Post by aristotelian » Wed Mar 13, 2019 8:03 am

Why would you wait for RMDs? Have you modeled out Roth conversions on the 401k as soon as you retire?

Also have either of you considered retiring earlier? You are essentially working for perhaps 75 cents on the dollar at this point.

What is your tax bracket while you are both working? Doing Roth conversions now seems like a terrible idea, no matter how bad your tax rate in retirement.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by livesoft » Wed Mar 13, 2019 8:11 am

Since you have predicted RMD, did you predict that your Toyota Camry will cost $200,000 then? A sushi lunch will be $100. And if you want a Mercedes, then it will be $750,000?
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Re: Predicted RMDs Have Caught Me By Surprise

Post by JW-Retired » Wed Mar 13, 2019 8:29 am

rkhusky wrote:
Tue Mar 12, 2019 1:46 pm
What is your marginal tax rate? And what do you expect your marginal tax rate will be at age 70.5, with RMD and SS?
This..... plus the marginal tax rate between when you retire at 62 and live on wife's income, or perhaps start taking some money from the 401k before 70.5? If you do end up after you are 70.5 and living on $120k RMDs plus SS that's a pretty comfortable income.......... but it's not going to be a huge tax bracket. We might have better suggestions if we had the whole picture?

You do surely need to delay SS as long as possible since it is going to be the least Fed + state taxed by a hefty margin.
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Re: Predicted RMDs Have Caught Me By Surprise

Post by The Wizard » Wed Mar 13, 2019 8:43 am

LMK5 wrote:
Tue Mar 12, 2019 3:27 pm
Thanks for all the answers. After reading through them, not surprisingly, there is no obvious answer/solution. After reading Ed Slott's book, it seems he is hell bent on converting all traditional pre-tax accounts to Roth as quickly as possible. He seems to know what he's talking about so it got my attention...
Ed Slott is grossly wrong about that so ignore him and pay attention here...
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Re: Predicted RMDs Have Caught Me By Surprise

Post by The Wizard » Wed Mar 13, 2019 9:21 am

Also, pay attention to projected Adjusted Gross Income for the next 15-20 years, rather than simply "expected tax bracket".

My marginal tax bracket fell from 28% to 24% this year but my total tax bill went up a bit due to reasons explained in other threads.

Using a spreadsheet to project your AGI year by year is a good idea. Try not to have your MFJ AGI increase by more than 4-5% per year, especially including the year(s) RMDs start.
Update this spreadsheet annually as updated info becomes available.

Hint: Roth conversions are one good way to increase your AGI in your pre-RMD years...
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Re: Predicted RMDs Have Caught Me By Surprise

Post by busdriver » Wed Mar 13, 2019 4:09 pm

retiredjg wrote:
Tue Mar 12, 2019 3:51 pm

You will have several years between age 62 and RMDs to do Roth conversions. That is a lot to convert, but I would leave at least $$300 - $500k in tIRA (not convert it to Roth).

If you try to convert $2.5 million in that 8 years or so, your tax bracket is going to be pretty high for those 8 years.

How high is your tax bracket now? That's really the crux of the whole matter.
Not sure why to leave anything in tIRA; however, if you do large Roth conversions, it will indeed make for higher taxes for those 8 years, but could put you in a lower bracket for the balance of your lives effectively paying less taxes overall and possibly a sizable tax-free amount leftover for heirs. If current tax system is revised with higher rates, then it makes this an even more attractive option to do.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by dpc » Wed Mar 13, 2019 4:19 pm

Ed Slott has been hard over on Roth conversions forever. He's convinced tax rates will rise significantly in the future. I'm sure I don't know. I just have a hard time believing paying taxes now that can be deferred until later is ever a really great strategy. Too many variables and unknown unknowns. I get the logic, but there are a lot of things that could happen in the next 12 years.
"Worrying is like paying interest on a debt that you might never owe" -- Will Rogers

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Re: Predicted RMDs Have Caught Me By Surprise

Post by retiredjg » Wed Mar 13, 2019 4:24 pm

busdriver wrote:
Wed Mar 13, 2019 4:09 pm
Not sure why to leave anything in tIRA....
There are a couple of reasons that I know of.

1) A year (or more) with very high medical bills or long term care such as dementia....those expenses could be very high and deductible from income. For a situation such as this, money in the tIRA might never be taxed so there is no point on converting it to Roth now.

2) Qualified charitable donations - I'm not sure how this is done, but if you sent your RMDs to charity, you don't pay taxes on it.

Both of these are examples of money that could be used but never taxed so there is no point in paying taxes on the entire IRA, just some or most of the IRA.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by White Coat Investor » Wed Mar 13, 2019 4:26 pm

LMK5 wrote:
Tue Mar 12, 2019 1:19 pm
I will be turning 58 in June, and would like to retire at 62. I've recently delved into RMD calculators and I was rather shocked to see that my initial RMD will be about 120k. My wife is 10 years younger than I am and I did input that information into the calculator.

I am currently putting the maximum allowed into my pre-tax 401k, along with maxing out my Roth IRA contributions. Unfortunately, because my wife will still be working when I retire I don't feel I will drop that much lower in my tax bracket in retirement, if at all, for at least the first 5 years of retirement.
Looking at possible strategies going forward, should I:

1) Stop putting money into the pre-tax 401k and contribute to the Roth 401k instead?
2) Start converting traditional IRA money to my Roth IRA each year, being careful not to jump tax brackets?
3) Do nothing differently, and just see what happens when the RMDs begin? Will I get killed on SS and Medicare surcharges?
4) Is it OK for my wife, being 10 years younger, to continue putting money into a pre-tax 401k since her RMDs would be 10 years later and also lower because of a smaller investment balance, or should she also use predominantly after-tax vehicles?

Thanks for any guidance you can provide.
That are far worse problems than big RMDs. But sure, the solution to that "problem" is Roth contributions/conversions between now and then.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Predicted RMDs Have Caught Me By Surprise

Post by Digital Dave » Wed Mar 13, 2019 5:17 pm

One way to cut the growth of your 401k is to put it in cash/bond fund. Increase the equities (tax efficient index funds) in your taxable accounts. Depending on how your desired asset allocation works out, put stock funds in your Roth if that pleases your asset allocation.

I'll be in RMD land next year, but several years ago I changed my IRA to 75% bonds. Now I'm 95% money market. I let my taxable accounts do the heavy lifting. Disclosure: I'm not nearly in the same brackets as you all. I'm still working on my first million. :)

Dave
Investing in Mutual Funds, ETF's, P2P Lending, Forever Stamps and Bittulips.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by retire2022 » Wed Mar 13, 2019 5:32 pm

LMK5 wrote:
Tue Mar 12, 2019 1:19 pm
I will be turning 58 in June, and would like to retire at 62. I've recently delved into RMD calculators and I was rather shocked to see that my initial RMD will be about 120k. My wife is 10 years younger than I am and I did input that information into the calculator.

I am currently putting the maximum allowed into my pre-tax 401k, along with maxing out my Roth IRA contributions. Unfortunately, because my wife will still be working when I retire I don't feel I will drop that much lower in my tax bracket in retirement, if at all, for at least the first 5 years of retirement.
Looking at possible strategies going forward, should I:

1) Stop putting money into the pre-tax 401k and contribute to the Roth 401k instead?
2) Start converting traditional IRA money to my Roth IRA each year, being careful not to jump tax brackets?
3) Do nothing differently, and just see what happens when the RMDs begin? Will I get killed on SS and Medicare surcharges?
4) Is it OK for my wife, being 10 years younger, to continue putting money into a pre-tax 401k since her RMDs would be 10 years later and also lower because of a smaller investment balance, or should she also use predominantly after-tax vehicles?

Thanks for any guidance you can provide.
I'm in the same boat, in order to do any Roth conversions you need to be able to thread the needle at zero income, or seeking a market crash, lower than your cost basis and what you paid/contributed to your fund.

I agree Ed Slott approach is easier and straight forward by eating the tax and NOT be paying tax on profits going to Roth 401K. Others will disagree with this but never the less a little pain in the beginning is more profit for your family. RMD may not be in your family best interest if the numbers don't work.

I recommend you make a spreadsheet and do a forensic accounting of what years you paid and what years you contributed.

Here are links which you can begin it took me two hours and the next step is to go through my 32 years of statements to verify the contributions.

record of tax rates from 1862-2013:

https://files.taxfoundation.org/legacy/ ... ominal.pdf

2013 going forward:

http://www.moneychimp.com/features/tax_brackets.htm

PS You can retrieve your employment history through Social Security Website and input that data in a spreadsheet with your tax bracket paid data history. With this information at hand you can see an objective whether or not it pays to convert to Roth. For those who press for traditional you will see that your profits in your contributions will be taxed.

here is what I did to see how my Iras, Roth Ira and salary history with tax bracket paid out, sorry I couldn't get the image link to post image, I recommend you click on link.

https://imgur.com/a/Gi5VKcO

good luck

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Re: Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Sun Mar 17, 2019 11:24 pm

Thanks for all the great suggestions. For those asking for current tax bracket information, for tax year 2018 we are in the 22% for federal, and 9.3% for state. Going forward, if I retire in 4.5 years at 62, do not take SS, and my wife keeps working (she's 10 years younger), I would expect my bracket to remain the same. When RMDs kick in, I would hope my wife retires, and then, if rates are similar, our tax bracket would be about the same.

Digital Dave had a good suggestion about keeping fixed income in retirement accounts, and having the equities in taxable accounts. I have been accenting fixed income for many years in retirement accounts because it seemed to take the most advantage of tax deferral. After all, why have equities in a before-tax retirement account and wind up paying ordinary income taxes where you could have taken advantage of capital gains tax rates in the taxable account?

One other things not touched on yet: By making Roth 401k contributions rather than pre-tax, my MAGI would likely be over the limit for Roth IRA contribution. Right now I contribute to pre-tax 401k, which brings the income down enough so I can max out the Roth IRA also. If I just do max Roth 401k and have to stop the Roth IRA contributions, am I worse off than maxing out the pre-tax 401k plus maxing out the Roth IRA?

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Re: Predicted RMDs Have Caught Me By Surprise

Post by celia » Mon Mar 18, 2019 12:11 am

LMK5 wrote:
Sun Mar 17, 2019 11:24 pm
One other things not touched on yet: By making Roth 401k contributions rather than pre-tax, my MAGI would likely be over the limit for Roth IRA contribution. Right now I contribute to pre-tax 401k, which brings the income down enough so I can max out the Roth IRA also. If I just do max Roth 401k and have to stop the Roth IRA contributions, am I worse off than maxing out the pre-tax 401k plus maxing out the Roth IRA?
It depends on which way you can get more in the Roth 401K/IRA. I would put as much in the Roth as I could, if I were you, in either place. If your wife can also do that now, that would also help. Yes, your current taxes would increase, but some Roth space for your highest expected growth funds (stock) would be great to have.

Once you've done that, can you also make the Backdoor Roth work for either/both of you? I ask that because you will pay the same taxes whether you put extra money (not needed for spending) into taxable or a Backdoor Roth. There are no income limits for doing a Backdoor 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.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Mon Mar 18, 2019 9:27 am

celia wrote:
Mon Mar 18, 2019 12:11 am
LMK5 wrote:
Sun Mar 17, 2019 11:24 pm
One other things not touched on yet: By making Roth 401k contributions rather than pre-tax, my MAGI would likely be over the limit for Roth IRA contribution. Right now I contribute to pre-tax 401k, which brings the income down enough so I can max out the Roth IRA also. If I just do max Roth 401k and have to stop the Roth IRA contributions, am I worse off than maxing out the pre-tax 401k plus maxing out the Roth IRA?
It depends on which way you can get more in the Roth 401K/IRA. I would put as much in the Roth as I could, if I were you, in either place. If your wife can also do that now, that would also help. Yes, your current taxes would increase, but some Roth space for your highest expected growth funds (stock) would be great to have.

Once you've done that, can you also make the Backdoor Roth work for either/both of you? I ask that because you will pay the same taxes whether you put extra money (not needed for spending) into taxable or a Backdoor Roth. There are no income limits for doing a Backdoor Roth.
Thanks Celia. I'll have to look into the backdoor Roth.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Mon Mar 18, 2019 9:29 am

aristotelian wrote:
Wed Mar 13, 2019 8:03 am
Why would you wait for RMDs? Have you modeled out Roth conversions on the 401k as soon as you retire?

Also have either of you considered retiring earlier? You are essentially working for perhaps 75 cents on the dollar at this point.

What is your tax bracket while you are both working? Doing Roth conversions now seems like a terrible idea, no matter how bad your tax rate in retirement.
aristotelian, can you clarify what you mean by "working for 75 cents on the dollar"?

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Re: Predicted RMDs Have Caught Me By Surprise

Post by Beehave » Mon Mar 18, 2019 9:48 am

OP's issue involves optimization relative to future tax rates and means-testing (in the form of graduated taxation on Soc'l Sec. payments and Medicare charges). Since we do not know what the future holds tax-wise, and since OP and spouse seem to have very ample resources, the best bet, in my opinion, would be to diversify across tax-category assets.

If pre-tax assets are already huge relative to Roth IRAs and other post-tax assets, fill the post-tax and start draining the pre-tax. Focusing on current tax-bracket jumps may or may not be a mistake -- if brackets rise significantly in the future, then conversions out of pre-tax IRAs at today's tax rates may look appealing. It would seem to be a good idea to start this diversification sooner rather than later.

My opinion, best wishes.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by aristotelian » Mon Mar 18, 2019 10:10 am

LMK5 wrote:
Mon Mar 18, 2019 9:29 am
aristotelian wrote:
Wed Mar 13, 2019 8:03 am
Why would you wait for RMDs? Have you modeled out Roth conversions on the 401k as soon as you retire?

Also have either of you considered retiring earlier? You are essentially working for perhaps 75 cents on the dollar at this point.

What is your tax bracket while you are both working? Doing Roth conversions now seems like a terrible idea, no matter how bad your tax rate in retirement.
aristotelian, can you clarify what you mean by "working for 75 cents on the dollar"?
If you keep working, but then lose, say, 22% of that income (plus state tax) to taxes, then you're only working for 75 cents on the dollar. It is possible that you could retire earlier and convert more of the 401k to Roth while you don't have Social Security or W2 income taking up your lower tax brackets.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Mon Mar 18, 2019 11:54 am

aristotelian wrote:
Mon Mar 18, 2019 10:10 am
LMK5 wrote:
Mon Mar 18, 2019 9:29 am
aristotelian wrote:
Wed Mar 13, 2019 8:03 am
Why would you wait for RMDs? Have you modeled out Roth conversions on the 401k as soon as you retire?

Also have either of you considered retiring earlier? You are essentially working for perhaps 75 cents on the dollar at this point.

What is your tax bracket while you are both working? Doing Roth conversions now seems like a terrible idea, no matter how bad your tax rate in retirement.
aristotelian, can you clarify what you mean by "working for 75 cents on the dollar"?
If you keep working, but then lose, say, 22% of that income (plus state tax) to taxes, then you're only working for 75 cents on the dollar. It is possible that you could retire earlier and convert more of the 401k to Roth while you don't have Social Security or W2 income taking up your lower tax brackets.
I see. I guess the juicy target is to get taxable income down to $78950 as that's the top of the 12% bracket. Next step is a steep one to 22%. Question: What does it mean when someone says to "fill up the brackets"?

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Re: Predicted RMDs Have Caught Me By Surprise

Post by Ketawa » Mon Mar 18, 2019 12:22 pm

LMK5 wrote:
Mon Mar 18, 2019 11:54 am
I see. I guess the juicy target is to get taxable income down to $78950 as that's the top of the 12% bracket. Next step is a steep one to 22%. Question: What does it mean when someone says to "fill up the brackets"?
In retirement, withdrawals from a Traditional IRA or 401k will be taxed as ordinary income. The vast majority of your RMDs will "fill up the brackets" at 0% (standard deduction), 10%, and 12%.

You projected having $120K in RMDs plus Social Security. The top of the 12% bracket will probably be close to $100K in 12 years. $120K in RMDs plus Social Security will probably only be enough to put you a little into the 22% tax bracket after taking the standard deduction, depending on whether you have any other income sources.

You need to be careful about your projection of $120K in RMDs. What is the current size of the Traditional accounts? How much of the $3.3M is future contributions? What was the rate of return for the projection?

You would be doing yourself a disservice by switching to all Roth 401k if you end up making your future Traditional balance so small that it will never fill up the 12% federal bracket, while simultaneously paying 22% federal + 9.3% state taxes now. At worst, you will approximately break even! This is why I voted for sticking with the Traditional 401k and doing Roth conversions to fill up the 12% bracket in years with less taxable income.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by WhiteMaxima » Mon Mar 18, 2019 12:30 pm

Do Roth conversion, you hear me? Or just do Roth 401k now if it doesn't push your to next high tax rate.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Mon Mar 18, 2019 1:12 pm

Ketawa wrote:
Mon Mar 18, 2019 12:22 pm
LMK5 wrote:
Mon Mar 18, 2019 11:54 am
I see. I guess the juicy target is to get taxable income down to $78950 as that's the top of the 12% bracket. Next step is a steep one to 22%. Question: What does it mean when someone says to "fill up the brackets"?
In retirement, withdrawals from a Traditional IRA or 401k will be taxed as ordinary income. The vast majority of your RMDs will "fill up the brackets" at 0% (standard deduction), 10%, and 12%.

You projected having $120K in RMDs plus Social Security. The top of the 12% bracket will probably be close to $100K in 12 years. $120K in RMDs plus Social Security will probably only be enough to put you a little into the 22% tax bracket after taking the standard deduction, depending on whether you have any other income sources.

You need to be careful about your projection of $120K in RMDs. What is the current size of the Traditional accounts? How much of the $3.3M is future contributions? What was the rate of return for the projection?

You would be doing yourself a disservice by switching to all Roth 401k if you end up making your future Traditional balance so small that it will never fill up the 12% federal bracket, while simultaneously paying 22% federal + 9.3% state taxes now. At worst, you will approximately break even! This is why I voted for sticking with the Traditional 401k and doing Roth conversions to fill up the 12% bracket in years with less taxable income.
I see your point Ketawa. It does make sense to assume that the bracket amounts will likely shift upward over the years also. I did the calculation again, this time using a 5% return. Still the first RMD is at 6 figures. The calculator(s) don't seem to take into account future contributions. They just use your last balance.

With your explanation about filling up the brackets, it got me to thinking. When a pre-tax retirement contribution is made, you get a tax deduction based on your marginal rate, which is the highest rate you pay based on your income. But when you take an RMD and have no other income, the withdrawals fill up all the lower brackets that your salary used to fill up when you were contributing, so only a part of the RMD/withdrawal should be taxed at the same marginal rate that applied to your deductible contribution. Doesn't this mean that a pre-tax account is more powerful than an after-tax account or am I missing something in the math?

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Re: Predicted RMDs Have Caught Me By Surprise

Post by aristotelian » Mon Mar 18, 2019 1:32 pm

Ketawa wrote:
Mon Mar 18, 2019 12:22 pm

You would be doing yourself a disservice by switching to all Roth 401k if you end up making your future Traditional balance so small that it will never fill up the 12% federal bracket, while simultaneously paying 22% federal + 9.3% state taxes now. At worst, you will approximately break even! This is why I voted for sticking with the Traditional 401k and doing Roth conversions to fill up the 12% bracket in years with less taxable income.
+1. I would like to see some actual math before suggesting he do any Roth conversions now.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by Ketawa » Mon Mar 18, 2019 1:35 pm

LMK5 wrote:
Mon Mar 18, 2019 1:12 pm
With your explanation about filling up the brackets, it got me to thinking. When a pre-tax retirement contribution is made, you get a tax deduction based on your marginal rate, which is the highest rate you pay based on your income. But when you take an RMD and have no other income, the withdrawals fill up all the lower brackets that your salary used to fill up when you were contributing, so only a part of the RMD/withdrawal should be taxed at the same marginal rate that applied to your deductible contribution. Doesn't this mean that a pre-tax account is more powerful than an after-tax account or am I missing something in the math?
Yes, this is why Traditional accounts are better for most people than Roth accounts. For a very broad generalization:

12% federal tax bracket or less - Traditional 401k & IRA better unless the investor is expecting income to go up in the future and continuous employment. Most people do expect income to go up, so Roth can make sense.
22% federal tax bracket or higher - Traditional 401k better for most people. Traditional IRA typically not an option due to phaseout of the contribution deduction so people use the Roth IRA.

People expecting pensions or other forms of taxable income may do better with Roth savings.

For a single person looking at 2019 taxes, phaseout of the deduction for a Traditional IRA starts at $64K in total income, about $12K into the 22% federal bracket for someone taking the standard deduction. There aren't a whole lot of people who are in the 22% federal tax bracket or higher and able to claim the full deduction for a Traditional IRA. I'm one of them, and I am using the Traditional 401k (slash TSP) and IRA, even though I expect a military pension.

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Re: Predicted RMDs Have Caught Me By Surprise

Post by LMK5 » Mon Mar 18, 2019 2:07 pm

Has anyone used Vanguard's Portfolio Advisory Services to help with retirement withdrawal strategies? Are they any good? Can you have a one-time meeting free of charge?

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