Reduce future RMD, Manage Retirement Income and Taxes

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Copernicus
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Reduce future RMD, Manage Retirement Income and Taxes

Post by Copernicus » Wed Mar 28, 2018 7:23 pm

Retirement strategy up here for comments:
Background:
- Both spouses older than 60 yrs.
- One, older spouse retired, second spouse would enjoy working for another 4 years. Both have IRAs.
- The bigger IRA RMD 4 yrs away, smaller IRA RMD 10 years away.
- Sufficient funds in bigger IRA to pay for annual expenses using (one RMD + one SS + dividends from taxable account). Further growth of IRA would mean larger RMDs, higher taxes.
- With one spouse working, current tax rate does not allow t-IRA to Roth IRA conversions. By the time second spouse stops working, first spouse RMDs will have started. That would make conversions less attractive.
- When the older spouse is gone, the second spouse will have to continue ** taking RMD from at least the older spouse's IRA or both IRAs (depends on age of second spouse).
- Therefore, need to try to moderate growth of / reduce future RMDs of both IRAs.

Actions to manage current and future taxes, income and RMDs:

Plan A:
- Reduce risk level of overall portfolio, Wider rebalancing bands to just control risk level, not grow principal by buying low/selling high
- Moderate future growth of IRAs and RMD by concentrating taxable bonds and slow-growth investments into IRAs
- All international stock index funds in taxable to get foreign tax credit
- Reducing REITs in IRA substantially to reduce portfolio risk level further down? (also, due to trend of rising rate)

Plan B: (Not desired by the working spouse)
- The second spouse retires earlier than planned, tax bracket becomes lower, convert some t-IRA to Roth IRA.
- AND older spouse starts taking social security earlier than age 70.
- Buy private insurance (How much premium cost??)
- Pay annual expenses from (some IRA conversion distribution + SS of older spouse + dividends from taxable).

Is anything missing? Comments, please.
Thanks.

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Peter Foley
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by Peter Foley » Wed Mar 28, 2018 7:45 pm

I think plan A is reasonable.

A couple other considerations that may or may not be relevant to your situation.

1. Set up contingent beneficiaries for the bigger IRA. (This supposes that there are children to whom one would want to bequeath all or part of an IRA.) Leave instructions for surviving spouse to disclaim all or part of the bigger IRA so that it passes to children and/or grandchildren.

2. Set in motion a plan to use Qualified Charitable Distributions for some portion of the RMD once RMD's are required.

It sounds as if you have sufficient funds for living expenses. What else do you want to do with your money?

sport
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by sport » Wed Mar 28, 2018 8:01 pm

Maybe I'm simplistic. I would rather earn more in the IRA and then use a portion of that increase to pay the taxes. The goal should not be to minimize taxes; it should be to maximize after tax results.

Copernicus
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by Copernicus » Wed Mar 28, 2018 8:28 pm

Peter Foley wrote:
Wed Mar 28, 2018 7:45 pm
I think plan A is reasonable.

A couple other considerations that may or may not be relevant to your situation.

1. Set up contingent beneficiaries for the bigger IRA. (This supposes that there are children to whom one would want to bequeath all or part of an IRA.) Leave instructions for surviving spouse to disclaim all or part of the bigger IRA so that it passes to children and/or grandchildren.

2. Set in motion a plan to use Qualified Charitable Distributions for some portion of the RMD once RMD's are required.

It sounds as if you have sufficient funds for living expenses. What else do you want to do with your money?
Thanks, Peter Foley.
Point 1: We have named kids as contingency beneficiaries for both IRAs, and we both know that we can disclaim, if appropriate.
Point 2: We have a DAF, and plan to donate significant portion to charity in future.

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Watty
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by Watty » Wed Mar 28, 2018 9:11 pm

Copernicus wrote:
Wed Mar 28, 2018 7:23 pm
Plan A:
- Reduce risk level of overall portfolio, Wider rebalancing bands to just control risk level, not grow principal by buying low/selling high Not sure what this means, not rebalancing as often would seem to increase risk.
- Moderate future growth of IRAs and RMD by concentrating taxable bonds and slow-growth investments into IRAs Bonds in the IRA is pretty standard no matter what. Other than bonds, what is "slow-growth"?
- All international stock index funds in taxable to get foreign tax credit Pretty standard.
- Reducing REITs in IRA substantially to reduce portfolio risk level further down? (also, due to trend of rising rate) Possible rate changes are already price in the market. What percent are in REITs now?

Plan B: (Not desired by the working spouse)
- The second spouse retires earlier than planned, tax bracket becomes lower, convert some t-IRA to Roth IRA. Spouse likes working, take this out of the discussion.
- AND older spouse starts taking social security earlier than age 70. The SS will likely be heavily taxed and may result in the surviving spouse have lowe SS for decades in the future. You would need to look at the numbers but this sounds like a bad idea.
- Buy private insurance (How much premium cost??) Expensive and might not be available next year with all the uncertainty about healthcare. May also need to change doctors. Cobra might be an option at 63.5 since 18 months(more in some states) would get the spouse to be 65 and getting Medicare.
- Pay annual expenses from (some IRA conversion distribution + SS of older spouse + dividends from taxable).If you paid the expenses from the taxable account you might be able to do more Roth conversions in a reasonable tax bracket.
A big thing that you are missing is how your choices affect your estate planning and the total taxes that will eventually be paid including whoever inherits the IRA some day. Minimizing the taxes while you are alive could backfire if you heirs get stuck with a large tax bill.

One other thing to keep in mind is that the RMD only starts out at 3.65% and don't get above 7% until you are 86. (See table III here)

https://www.bogleheads.org/wiki/IRA_distribution_tables

This means that if your investments earn 7%, including inflation, then you will not have to actually start drawing down your IRA until you are 86 so once the RMD starts at 70 it could still be growing for another 16 years or so along with your taxable accounts that the unneeded RMDs are put into.

Under the current tax laws there is also a "silver lining" to taking an unneeded RMD. That is that the money from the RMD does not just go away but likely would be invested in something relatively tax efficient like a total stock market(TSM) index fund that would go to your estate at a stepped up cost basis and they would never need to pay the capital gains taxes on that.

Paying taxes on the unneeded RMD will not be fun but be sure to look at the big picture, they may not be all that bad.
Copernicus wrote:
Wed Mar 28, 2018 7:23 pm
- When the older spouse is gone, the second spouse will have to continue ** taking RMD from at least the older spouse's IRA or both IRAs (depends on age of second spouse).
Or if you have other ample assets you could leave the IRA, or part of the IRA, to someone other than the spouse. (Having a trust as an IRA beneficiary can be tricky, only do that with good legal advice.)

Life can also through you curveballs. While it might be statistically likely that the older spouse will pass first there is also a very reasonable chance that the younger spouse will end up dying first. You need to have a contingency plan for that.

delamer
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by delamer » Wed Mar 28, 2018 9:53 pm

sport wrote:
Wed Mar 28, 2018 8:01 pm
Maybe I'm simplistic. I would rather earn more in the IRA and then use a portion of that increase to pay the taxes. The goal should not be to minimize taxes; it should be to maximize after tax results.
This was my reaction to the OP’s initial post too. By all means, make your portfolio more tax efficient by choosing the best options for your taxable versus tax deferred accounts. But reducing taxes at the expense of growth makes no sense.

There are legimate reasons to discourage a spouse over 60 from working, but in order to save on taxes is not one of them.

Maybe if you posted actual amounts in your accounts and specifics on the investments held, we could give you some good ideas.

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Peter Foley
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by Peter Foley » Wed Mar 28, 2018 10:21 pm

Copernicus wrote:
Point 2: We have a DAF, and plan to donate significant portion to charity in future.
We too have a donor advised fund. However, as a result of changes to the tax code, in 2018 and beyond I do not see us itemizing deductions. Therefore, when we reach RMD's it will be more advantageous to us tax wise to limit income through RMD qualified charitable contributions (22% rate) than using a DAF to avoid capital gains (15% rate on gains plus the zero rate cost of donating the original investment.) Same dollars to charity, just a different source.

The Wizard
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by The Wizard » Thu Mar 29, 2018 2:22 am

sport wrote:
Wed Mar 28, 2018 8:01 pm
Maybe I'm simplistic. I would rather earn more in the IRA and then use a portion of that increase to pay the taxes. The goal should not be to minimize taxes; it should be to maximize after tax results.
Yes, focus on this.
We need to be aware that higher taxes will be due on higher income in retirement for some of us, but overall it's not a terrible thing...
Attempted new signature...

kenoryan
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by kenoryan » Thu Mar 29, 2018 5:31 am

How much RMD are you considering too high? In actual dollars? I’m interested in your strategy. I wouldn’t mind taking a larger RMD even if I had to pay some taxes on it. What’s the harm in paying taxes if in the end you still get a sizable amount of money after taxes? Does it affect your Medicare or social security?

Dandy
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by Dandy » Thu Mar 29, 2018 6:02 am

I feel your pain. Don't need much if any of my RMD to support our current lifestyle. But, since your can't take it with your RMDs are a reminder that you have to deal with the enviable position of having more assets/income then you need.

After a lifetime of saving, investing, living below your means and watching your nest egg grow you are in a different phase of life. I'm still dealing with this change. I have two children and two grandchildren. Both children are married and all are working hard but having some difficulty making ends meet in a high cost of living area. We decided to start an "early inheritance" program where we gift a large portion of our net RMD to them. Why have them wait 20 years ( I hope) before they inherit a large sum? We are careful not to put our financial security at risk. This has helped me deal with taking RMDs and paying more in taxes. If I didn't have children I would hope I could do the same with supporting charities.

Secure your future, increase your lifestyle -- you have earned it and if you have extra assets beyond that try to do something good with the extra.

Copernicus
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Re: Reduce future RMD, Manage Retirement Income and Taxes

Post by Copernicus » Thu Mar 29, 2018 11:10 am

Watty wrote:
Wed Mar 28, 2018 9:11 pm
Copernicus wrote:
Wed Mar 28, 2018 7:23 pm
Plan A:
- Reduce risk level of overall portfolio, Wider rebalancing bands to just control risk level, not grow principal by buying low/selling high Not sure what this means, not rebalancing as often would seem to increase risk.
- Moderate future growth of IRAs and RMD by concentrating taxable bonds and slow-growth investments into IRAs Bonds in the IRA is pretty standard no matter what. Other than bonds, what is "slow-growth"?
- All international stock index funds in taxable to get foreign tax credit Pretty standard.
- Reducing REITs in IRA substantially to reduce portfolio risk level further down? (also, due to trend of rising rate) Possible rate changes are already price in the market. What percent are in REITs now?
Thanks! I am currently at 7% REIT of total portfolio, in IRAs. Not a huge proportion, but I went through a tedious list of everything to see where there are holes in each action, if the goal was to reduce RMDs!

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