"When Adding to Your Retirement Account is a Bad Idea"

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lostdog
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"When Adding to Your Retirement Account is a Bad Idea"

Post by lostdog » Tue Apr 16, 2019 11:09 am

The article below has me really thinking about future RMD's. I used Vanguard’s estimated RMD tool. Based on our current IRA and 401k balances with 6% growth, in 2046 RMD's with social security will land us into the next tax bracket.


"When Adding to Your Retirement Account is a Bad Idea"

https://wealthyaccountant.com/2019/03/3 ... -bad-idea/

Quote from the article:
"Keith’s Rule 76: If investing in a deductible retirement account doesn’t provide additional tax benefits outside a simple deduction it is probably not worth it."

Any thoughts on this?

I used this Vanguard RMD tool.

https://personal.vanguard.com/us/insigh ... ol?lang=en
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staythecourse
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by staythecourse » Tue Apr 16, 2019 11:17 am

There is nothing preventing one from saving in tax deferred 401k, retire early, rollover to trad. IRA and start converting to Roth.

I do agree if one thinks about RMD being an issue then folks should think more seriously about retiring early or going part time and start converting to roth and not wait just to find out RMD hit becomes huge.

Good luck.
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by White Coat Investor » Tue Apr 16, 2019 11:18 am

Basically, it's never bad. If it is bad, then do Roth conversions and then it isn't bad.

The "RMD Problem" is dramatically oversold (usually by someone selling something) and has a simple solution.
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: "When Adding to Your Retirement Account is a Bad Idea"

Post by ResearchMed » Tue Apr 16, 2019 11:19 am

lostdog wrote:
Tue Apr 16, 2019 11:09 am
The article below has me really thinking about future RMD's. I used Vanguard’s estimated RMD tool. Based on our current IRA and 401k balances with 6% growth, in 2046 RMD's with social security will land us into the next tax bracket.


"When Adding to Your Retirement Account is a Bad Idea"

https://wealthyaccountant.com/2019/03/3 ... -bad-idea/

Quote from the article:
"Keith’s Rule 76: If investing in a deductible retirement account doesn’t provide additional tax benefits outside a simple deduction it is probably not worth it."

Any thoughts on this?

I used this Vanguard RMD tool.

https://personal.vanguard.com/us/insigh ... ol?lang=en
You've got this amount of precision about tax brackets in.. 2046 ?
(And other assorted tax rules?)

RM
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lostdog
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by lostdog » Tue Apr 16, 2019 11:21 am

ResearchMed wrote:
Tue Apr 16, 2019 11:19 am
lostdog wrote:
Tue Apr 16, 2019 11:09 am
The article below has me really thinking about future RMD's. I used Vanguard’s estimated RMD tool. Based on our current IRA and 401k balances with 6% growth, in 2046 RMD's with social security will land us into the next tax bracket.


"When Adding to Your Retirement Account is a Bad Idea"

https://wealthyaccountant.com/2019/03/3 ... -bad-idea/

Quote from the article:
"Keith’s Rule 76: If investing in a deductible retirement account doesn’t provide additional tax benefits outside a simple deduction it is probably not worth it."

Any thoughts on this?

I used this Vanguard RMD tool.

https://personal.vanguard.com/us/insigh ... ol?lang=en
You've got this amount of precision about tax brackets in.. 2046 ?
(And other assorted tax rules?)

RM
I'm assuming it will be close but I get your point.
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by chevca » Tue Apr 16, 2019 11:22 am

From the article...
[/While $2 million sounds like a lot—and it is; trying to save a few more tax dollars today can hurt you a lot later. In the example above the RMD the first year exceeds $500,000!

I think he needs some work on his math. I get an RMD for that person of about $73k at age 70. The rest of the article pretty much speaks for itself with examples like that being used.

And, how do you or any of us know what taxes and RMDs might be like in 2046?


** not sure what I did, or how to fix, but the bold part is mine.
Last edited by chevca on Tue Apr 16, 2019 11:25 am, edited 2 times in total.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by lostdog » Tue Apr 16, 2019 11:23 am

White Coat Investor wrote:
Tue Apr 16, 2019 11:18 am
Basically, it's never bad. If it is bad, then do Roth conversions and then it isn't bad.

The "RMD Problem" is dramatically oversold (usually by someone selling something) and has a simple solution.
I agree. Roth conversions should be part of the plan.
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by Dottie57 » Tue Apr 16, 2019 11:24 am

Just remember worrying about RMDs is a sign you have saved and invested well.

That being said I have eight years of Roth conversions lined up until I reach SS. Reducing RMDs is good for me. Did not enjoy paying estimated tax yesterday.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by NotWhoYouThink » Tue Apr 16, 2019 11:25 am

It really is not a bad idea to have so much income you have to pay taxes. Having a lot of income is good.

Paying more tax now so you can pay less later is only good if you end up with more money at some point in your lifetime.

Yes, it looks like someone manufacturing a problem that you can pay them to solve.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by sjt » Tue Apr 16, 2019 11:25 am

lostdog wrote:
Tue Apr 16, 2019 11:09 am

Any thoughts on this?
Yes: Once stash is big enough retire early and strategically withdraw before RMD's become a problem (and if they do become a problem then congratulations, it's a pretty good problem to have). There's not an excuse for RMD's to be a problem with basic planning.
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lostdog
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by lostdog » Tue Apr 16, 2019 11:27 am

NotWhoYouThink wrote:
Tue Apr 16, 2019 11:25 am
It really is not a bad idea to have so much income you have to pay taxes. Having a lot of income is good.

Paying more tax now so you can pay less later is only good if you end up with more money at some point in your lifetime.

Yes, it looks like someone manufacturing a problem that you can pay them to solve.

I think you're right.
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by lahob » Tue Apr 16, 2019 11:31 am

chevca wrote:
Tue Apr 16, 2019 11:22 am
From the article...
While $2 million sounds like a lot—and it is; trying to save a few more tax dollars today can hurt you a lot later. In the example above the RMD the first year exceeds $500,000!
I think he needs some work on his math. I get an RMD for that person of about $73k at age 70. The rest of the article pretty much speaks for itself with examples like that being used.

And, how do you or any of us know what taxes and RMDs might be like in 2046?


** not sure what I did, or how to fix, but the bold part is mine.
The article is unclear at this point, but I think the author is basing the $500k RMD on a tax-deferred account with $16 million. (Because, you know, everyone can expect their 401(k) to double every 7 years.)

If someone wants to give me $16 million I'll happily pay the taxes on the RMDs. That's not a bad problem to have.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by texasdiver » Tue Apr 16, 2019 11:46 am

I'm confused.

What does the author suggest that the $16 million 401(k) account holder do with her $16 million if not actually spend it? Just keep it stashed away and sheltered from taxes forever?

Oh wait...I get it! He wants you to give up your tax deduction and instead give him the money to put in taxable accounts where you pay him 1% a year so that you'll owe LTCG taxes instead.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by cherijoh » Tue Apr 16, 2019 12:39 pm

White Coat Investor wrote:
Tue Apr 16, 2019 11:18 am
Basically, it's never bad. If it is bad, then do Roth conversions and then it isn't bad.

The "RMD Problem" is dramatically oversold (usually by someone selling something) and has a simple solution.
I agree.

I have a few problems with the logic used to come up with the shocking $500K RMD at 70.5.

For one thing, not that many 50 year olds have a traditional account balance of $2M - couples maybe, individuals not so much. Doctors and other wealthy self employed people yeah, OK - but a small % of the population.

Even if they did, would they continue to leave it invested in 100% stocks? I hope not! So for a reasonable 50-yo AA, they should not expect to get a 7% return IMO. Oops, I just noticed - the 7% return is AFTER inflation, so I don't even think that's reasonable for a 100% stock fund starting from this point in the market cycle.

Besides someone with a $2M in a tradition 401k should be close to FI which leaves plenty of time to retire early and do Roth conversions.
Last edited by cherijoh on Tue Apr 16, 2019 12:48 pm, edited 1 time in total.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by cherijoh » Tue Apr 16, 2019 12:44 pm

chevca wrote:
Tue Apr 16, 2019 11:22 am
From the article...
[/While $2 million sounds like a lot—and it is; trying to save a few more tax dollars today can hurt you a lot later. In the example above the RMD the first year exceeds $500,000!
I think he needs some work on his math. I get an RMD for that person of about $73k at age 70. The rest of the article pretty much speaks for itself with examples like that being used.

And, how do you or any of us know what taxes and RMDs might be like in 2046?


** not sure what I did, or how to fix, but the bold part is mine.
He's assuming the $2M turns at 50 into $16M by the time the person turns 70.5.
Remember, a 50 year old will need to start taking required distributions in 20 years. Since, on average, the investment will double every 7 years in nominal terms the $2 million doubles to $4 million, then to $8 million and then to nearly $16 million when RMDs kick in!
His assumption is 10% growth per year and the rule of 72.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by randomguy » Tue Apr 16, 2019 3:03 pm

This guy seems to be focused on minimizing taxes (in some absolute way) rather than maximizing spendable money. Lets compare his solution 2 of using taxable instead of tax deferred
100k to invest. Money will go up 10x over the lifespan. You are paying 40% taxes on OI, 20% on LTGC

a) tax deferred
100k*10x = 1 million -400k in taxes = 600k of spendable money

b) taxable
(100k-40k of OI taxes)*10x= 600k -100k of LTGC = 100k of spendable money.

Would you rather pay 400k of taxes and spend 600k or pay 140k of taxes and spend 500k? Most people I know would much rather pay a 400k of taxes and spend an extra 100k.

It is easy to complain about RMDs. But you always have to figure out the alternative cost of avoiding them. It can be surprising high.

This guy is obviously selling his services. He will talk about how he saved you 260k in taxes. He will not talk about the 100k less you have to spend. Maybe some of his other advice is decent but anyone who has such a fundamental misunderstanding of the the tax code falls into I should ignore what they have to say until proven otherwise group.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by grabiner » Tue Apr 16, 2019 9:42 pm

If you will withdraw the money in a higher tax bracket, then Roth may be better than traditional, but it is hard to have a situation in which taxable is better than traditional, except for a high-fee 401(k) or 403(b) plan.

Suppose that you are in a 24% tax bracket now, and will be in a 32% tax bracket when you spend the money. You put $10,000 in a 401(k) for $7600 out of pocket, and you get the returns of a $6800 tax-free investment. This is 10% worse than a Roth.

But if you invest in a taxable account instead, you would only have the $7600 to invest. You will probably lose more than 10% to taxes on a long-term investment, since you will pay 18.8% tax on the capital gain alone. In practice, you will lose more than 18.8% of your gain, because you will pay tax on the dividends every year. State taxes make it even worse.

And if you never sell the investment, then once you have left your employer, you can convert the traditional IRA to a Roth IRA in order to keep tax deferral for the rest of your life. You have the same 10% loss if you couldn't manage to convert at 24%, but you will lose more than 10% to dividend taxes on your taxable stock investment over this long a term.
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by averagedude » Tue Apr 16, 2019 10:09 pm

If you are equity heavy and expecting a high rate of return on stocks in the future, RMD's from your traditional accounts can be a good problem to have. You never hear this, but the best thing to happen if you are trying to transfer assets to the next generation, is to have stocks have a major decline, and then you do your RMD's when stock prices are low,as long as you believe that stock prices will recover like they have done in the past.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by randomguy » Tue Apr 16, 2019 11:42 pm

averagedude wrote:
Tue Apr 16, 2019 10:09 pm
If you are equity heavy and expecting a high rate of return on stocks in the future, RMD's from your traditional accounts can be a good problem to have. You never hear this, but the best thing to happen if you are trying to transfer assets to the next generation, is to have stocks have a major decline, and then you do your RMD's when stock prices are low,as long as you believe that stock prices will recover like they have done in the past.
Can you show your math? The way I see it

a) 1 million dollars. 400k in taxes. Heirs get 600k. Stocks drop 50% and then recover. They have 600k with no tax bill
b) 1 million dollars. Stocks drop 50%. 500k pay 200k in taxes. Heirs get 300k. Stocks double back to the start point and the heirs have 600k with 300k of gains. There are some advantages of only using 300k instead of 600k of the gift tax (or estate tax) but in exchange you end up paying more in taxes.

Unless you lose enough to end up with a different tax cost, I am not sure how you come out ahead.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by averagedude » Wed Apr 17, 2019 12:05 am

You also need to take account the tax bracket that you may have and the tax brackets that your heirs will have in the future. If you have been successful, your tax brackets will be higher than what your heirs will inherit if they are low wage earners. There are many complexities in the tax code, and the more successful you are, the higher the taxes you pay, but your heirs may pay at a lower tax bracket.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by randomguy » Wed Apr 17, 2019 12:27 am

averagedude wrote:
Wed Apr 17, 2019 12:05 am
You also need to take account the tax bracket that you may have and the tax brackets that your heirs will have in the future. If you have been successful, your tax brackets will be higher than what your heirs will inherit if they are low wage earners. There are many complexities in the tax code, and the more successful you are, the higher the taxes you pay, but your heirs may pay at a lower tax bracket.
Yes but that doesn't change the fact that the stock dropping doesn't really help. If I am in the 40% tax level, dying and letting my heir take it out at 20% is a win. But it doesn't matter if stocks drop 50% right before I die, and rise afterwards. The big exception would be if I hit the estate tax where a 50% drop would reduce the amount of that tax. The smaller exception is when I can take it out at lower rates because of the drop. Maybe if stocks drop 50% I only have to pay 30% instead of 40%. Then you might come out ahead depending on how things like TLH and capital gains interact.

Again maybe I am missing something so feel free to provide an example of why you think this is the best thing to happen.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by SGM » Wed Apr 17, 2019 2:38 am

I always maximized my tax deferred accounts. When I cut back my working hours I began to do some Roth conversions yearly and eventually converted all tax deferred accounts to Roth accounts prior to taking delayed until 70 SS. I calculated that I would be paying a combined federal and state tax at 34% on my RMD if I had to take the first one in 2018. In future years the taxation would likely be higher. It is a fait accompli so I am not spending much time making calculations. I might just plug numbers into a tax program once a year just to gloat. :wink:

Taxes on conversions were paid from taxable accounts. I would not have done the conversions if I had to pay the taxes out of the traditional IRA. Others can do as they please.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by StealthRabbit » Wed Apr 17, 2019 4:18 am

RMD is NOT a significant concern for most 'planned' retirement accounts (usually overstated burden).


Just keep planning (as we have since paying taxes on earnings since age 15...)

Run the numbers... if a deductible tIRA benefits you... TAKE it and run. Use the low earning yrs for Roth rolls. (Pre-Medicare age ACA qualification yrs for us).

Age 65 (post medicare), - age 70 ( RMD ) = a GREAT time to;
1) Roth Roll,
2) Draw down taxable qualified accts,
3) Add to your DAF.
4) Buy a life annuity :? ... :wink: / Insurance conversion product / LTC

age 70 arrives and you still have RMD's...?
1) = you have LOTS of dough, or
2) you need to keep doing Roth rolls, or
3) QCD's
4) SPEND!!! (buy your grandkids a viable business!)


99)... or... Pay RMD's

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by bampf » Wed Apr 17, 2019 5:39 am

staythecourse wrote:
Tue Apr 16, 2019 11:17 am
There is nothing preventing one from saving in tax deferred 401k, retire early, rollover to trad. IRA and start converting to Roth.

I do agree if one thinks about RMD being an issue then folks should think more seriously about retiring early or going part time and start converting to roth and not wait just to find out RMD hit becomes huge.

Good luck.
I may be missing something, but, how does one "start converting" to Roth when you have an IRA? I think the rules require that you convert all or nothing (or you only get a %portion of the conversion). If I have $1MM in IRA I can just convert some portion of that, can I?

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by Miguelito » Wed Apr 17, 2019 6:25 am

bampf wrote:
Wed Apr 17, 2019 5:39 am
I may be missing something, but, how does one "start converting" to Roth when you have an IRA? I think the rules require that you convert all or nothing (or you only get a %portion of the conversion). If I have $1MM in IRA I can just convert some portion of that, can I?
Sure you can.

Maybe you are getting confused with the pro-rata rule regarding after tax and pre-tax (dax-deferred) IRA's, where when you have both types and you want to convert to a Roth IRA, you can't choose just the after-tax IRA to convert. Instead, whatever amount you convert has to be a ratio of the original balances of each.

But my understanding is that you can convert any amount you wish from any* tax-deferred (traditional) IRA into a Roth IRA. You just pay ordinary income taxes on that amount.

*This includes a rollover IRA from a 401k.
Last edited by Miguelito on Wed Apr 17, 2019 7:56 am, edited 1 time in total.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by -ryan- » Wed Apr 17, 2019 6:36 am

Don't let the tax tail wag the financial planning dog.

Adding to your retirement account is a bad idea if you have more pressing financial priorities. Adding to your retirement account so that you end up with $16 million and have to pay taxes on big RMD's is for most of us a non-issue, and for some of us something that may require some adjustments over time. I personally will pay the taxes if I can have $500,000 in annual RMD's (inflation adjusted), and I am sure I can find useful things to do with the rest of the money.

In terms of the return adjustments, historically that is what you would have gotten with the S&P 500. Some are discussing drastically lower returns. I am cautiously optimistic and use 5% real for planning purposes, but secretly hope for that 7% real we were treated to over the long term!

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by averagedude » Wed Apr 17, 2019 7:37 am

randomguy wrote:
Tue Apr 16, 2019 11:42 pm
averagedude wrote:
Tue Apr 16, 2019 10:09 pm
If you are equity heavy and expecting a high rate of return on stocks in the future, RMD's from your traditional accounts can be a good problem to have. You never hear this, but the best thing to happen if you are trying to transfer assets to the next generation, is to have stocks have a major decline, and then you do your RMD's when stock prices are low,as long as you believe that stock prices will recover like they have done in the past.
Can you show your math? The way I see it

a) 1 million dollars. 400k in taxes. Heirs get 600k. Stocks drop 50% and then recover. They have 600k with no tax bill
b) 1 million dollars. Stocks drop 50%. 500k pay 200k in taxes. Heirs get 300k. Stocks double back to the start point and the heirs have 600k with 300k of gains. There are some advantages of only using 300k instead of 600k of the gift tax (or estate tax) but in exchange you end up paying more in taxes.

Unless you lose enough to end up with a different tax cost, I am not sure how you come out ahead.
Lets do the math from someone who is doing a ROTH conversion and is going to pay the taxes out of their taxable account.
a) 1 million dollars. Convert to ROTH. Pay 40% tax, lose 400k out of your taxable account. Heirs have 1 million to spend.
b) 1 million dollars. Stocks drop 50%. Convert to ROTH when account is 500k. Pay 40% tax, lose 200k out of your taxable account. Stocks bounce back and heirs have 1 million to spend. You have 200k more money in your taxable account due to paying less tax because stocks had lost half their value when making your conversion.
Really though, the math only works in this scenario if you are paying the taxes with fixed income holdings. Some people do find themselves in this situation.
Last edited by averagedude on Wed Apr 17, 2019 7:58 am, edited 1 time in total.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by livesoft » Wed Apr 17, 2019 7:53 am

I looked briefly at the Vanguard RMD calculator. It only calculates the RMD. It does not figure out taxes because it doesn't take into account the automated increases in the standard deduction and other things.

I do agree that there is no point in contributing to a non-deductible tIRA unless the money gets converted reasonably quickly to a Roth IRA. Otherwise, one might as well invest tax-efficiently in a taxable account.

But if RMDs are going to be a problem, then I suggest that you either

(a) quit working now, retire, and start spending your stash
-or-
(b) keep working until you die.
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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by ctuser1 » Wed Apr 17, 2019 8:00 am

If trusts are a part of your estate planning, then retirement accounts can cause a lot of unnecessary complication.

Sending retirement money to the trust will cause rapid RMD and consequent tax burdens. There are apparently ways to avoid that - but they come with drawbacks w.r.t. medicaid clawback, what happens to the money after the beneficiary's death etc.

My research was specific to SSNT's, since I need to do that for one of the kids. AFAIK however, this will be a problem with any kind of trusts meant for kids or future generation. Based on my limited knowledge so far, trusts are much better off funded with post-tax, unencumbered money.

I'd be extremely happy if I am shown to be wrong here. I have 80% of my net-worth tied up in 401k/IRA/Roth/HSA.

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Re: "When Adding to Your Retirement Account is a Bad Idea"

Post by nguy44 » Wed Apr 17, 2019 8:51 am

I probably made this "mistake". I have a large 401K. Due to a good pension and investment returns I cannot do "massive" Roth conversions without moving into a high tax bracket. So when RMDs hit I will likely be in the same tax bracket as I am now. However, I made the tax deferred contributions when I was in higher tax brackets (28/33), so being in the 22 (and possibly 24) brackets I will still be ahead (as well as what one can assume tax brackets will be after the current ones expire, and/or what Congress may do).

The best RMD tax savings I can plan for is to move to a state with little/no income tax. :D

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