The RMD Tax Bomb

[+ SundayZip]

My taxable income is going to explode when I turn 73. Yikes! 😵  Required Minimum Distributions (RMD)s from a tax-deferred IRA account are the biggest culprits.  When I add RMDs to existing pension income and social security, which I'll start taking at age 70, my taxable, ordinary income (excludes capital gains) will be the highest of my entire life. And, of course, Medicare part B and D premiums will go way up due to the Modified Adjusted Gross Income (MAGI) adjustments. This pains me. 

I'd interested in hearing what others are doing (or have done) to mitigate or reduce their RMD driven tax bomb?  

[Kevin Slater]

May all your problems be so happy.

Kevin Slater

[+ Vegas_Millennial]

4 hours ago, SundayZip said:

I'd interested in hearing what others are doing (or have done) to mitigate or reduce their RMD driven tax bomb?  

Roth.

100 percent of my retirement portfolio has been converted over to Roths.

[Beancounter]

Nothing you can do.   Count your blessings, pay your taxes and enjoy life.  
 

I’ve been subject to IRMAA (income related monthly adjustment amount) for several years now.  No big deal.  There are many people who would love to be in our shoes.  
 

If you’d been smart you should have been doing incremental Roth conversions annually to lower your RMDs once you hit 73.  

[GTMike]

On 3/14/2023 at 10:49 AM, SundayZip said:

My taxable income is going to explode when I turn 73. Yikes! 😵  Required Minimum Distributions (RMD)s from a tax-deferred IRA account are the biggest culprits.  When I add RMDs to existing pension income and social security, which I'll start taking at age 70, my taxable, ordinary income (excludes capital gains) will be the highest of my entire life. And, of course, Medicare part B and D premiums will go way up due to the Modified Adjusted Gross Income (MAGI) adjustments. This pains me. 

I'd interested in hearing what others are doing (or have done) to mitigate or reduce their RMD driven tax bomb?  

Have you reserached QLAC's? - Qualified Longevity Annuity Contracts.

It is a way to creatively help reduce the amount of the 401k/IRA (not Roth), that is used to calculate the annual RMD's.

This article from a couple years ago explains them. - https://www.forbes.com/advisor/retirement/qlac-qualified-longevity-annuity-contract/

I believe the amount was increased in CY 2023 from the maximum of $135,000 or 25% of the tax deferred amount to $200,000 or 25% that you can withdraw from the account when purchasing Annuity Contracts that you can use to help with financial planning and flexibility in your 70's to basically around 85.

Basically you can withdraw up to the maximun allowed per year out of the account tax free if it is used to purchase specific types of annuity contracts.

Then you can time/optimize when the annuity contracts start paying you and continue deferring paying the tax until receiving that income.

Edited March 15, 2023 by GTMike
Grammar correction and additional information

[+ Charlie]

The RMDs do raise our annual taxable income, but my spouse and I are lucky that we have never needed the money from our separate retirement accounts (a 401(k) for him and a 403(b) for me) for annual living expenses. My spouse's financial advisor simply re-invests his RMD in another investment account. I usually take mine in cash, and use it for non-essential purchases, like travel, or for charitable donations (which are tax deductible). I used last year's RMD to pay cash for a new car, rather than take out a loan. If we live long enough (say from 90 to 110),  I'm sure we will actually need the money from the retirement accounts for essential care expenses, but for now I'm happy enough with the way things are structured.

[+ DERRIK]

Take it up with the boss after you die

[handiacefailure]

I know I’ll have to deal with RMDs since my last employer didn’t offer a Roth option for the 401K and  the Roth match is in a pretax account but most of my money is in Roth accounts and thanks to the changes RMD’s arent required on Roth accounts.   I’m planning on having my match be treated post tax pretty soon as well.

 

[+ jrhoutex]

On 3/15/2023 at 1:07 PM, Charlie said:

The RMDs do raise our annual taxable income, but my spouse and I are lucky that we have never needed the money from our separate retirement accounts (a 401(k) for him and a 403(b) for me) for annual living expenses. My spouse's financial advisor simply re-invests his RMD in another investment account. I usually take mine in cash, and use it for non-essential purchases, like travel, or for charitable donations (which are tax deductible). I used last year's RMD to pay cash for a new car, rather than take out a loan. If we live long enough (say from 90 to 110),  I'm sure we will actually need the money from the retirement accounts for essential care expenses, but for now I'm happy enough with the way things are structured.

A more tax efficient manner to donate to a charity is the use of a qualified charitable distribution (QCD).  A retiree can donate all, or a portion, of their RMD directly to a charity.  The annual limit is $100K per account owner.  With a QCD, your IRA custodian sends a check directly to the charity.  A QCD does not provide a charitable deduction for the taxpayer but it also does not add taxable income to the retiree’s tax return.

If a retiree adds the RMD to taxable income and then writes a check to the charity for a tax deduction, there is a wash.  However, by using a QCD, the retiree does not include in taxable income the contribution (up to the annual $100K limit per account owner) and then the retiree may choose the standard deduction for a more tax efficient charitable donation strategy.   
Additionally, a retiree who writes check to the charity for an itemize tax deduction is also limited to a federal tax deduction of 50% of AGI.

To illustrate the QCD strategy vs adding the RMD to taxable income and taking an itemize tax deduction, assume a retiree has $75,000 pension income and the RMD is $100K.

Here's a Forbes article about OCD's - https://www.forbes.com/sites/kristinmckenna/2021/08/23/how-to-donate-your-rmd-using-qualified-charitable-distributions/?sh=6598f3663b5e

 

 

Edited March 26, 2023 by jrhoutex
typo

[+ jrhoutex]

On 3/14/2023 at 12:49 PM, SundayZip said:

My taxable income is going to explode when I turn 73. Yikes! 😵  Required Minimum Distributions (RMD)s from a tax-deferred IRA account are the biggest culprits.  When I add RMDs to existing pension income and social security, which I'll start taking at age 70, my taxable, ordinary income (excludes capital gains) will be the highest of my entire life. And, of course, Medicare part B and D premiums will go way up due to the Modified Adjusted Gross Income (MAGI) adjustments. This pains me. 

I'd interested in hearing what others are doing (or have done) to mitigate or reduce their RMD driven tax bomb?  

IncomeStrategy.com is a subscription-based software tool that allows one to run different scenarios with respect to Roth Conversion and different income strategies for retirement income.  The basic subscription is $20 per month and you can cancel at any time.  The software is probably best suited for a person with a financial background as its fairly complex.  Obviously, the results are based on your input, desired investment risk levels, and your estimated inflation rates.  The tool has assisted me in determining the optimal ROTH conversions prior to age 73.  A ROTH conversion strategy is still based on an estimated future return rate and longevity.  You may not want to convert all of your tax deferred accounts (IRAs/401Ks) if you plan on future charitable donations.  Making charitable donations through a qualified charitable donation (QCD) directly from the IRA is a more tax-efficient method.

A series of ROTH conversion prior to age 73 may or may not be beneficial.  It’s all based on your own personal financial circumstances and how you plan to spend/donate your tax deferred assets.

Edited March 26, 2023 by jrhoutex
typo

[+ SundayZip]

IncomeStrategy.com looks interesting. Thanks @jrhoutex! I've been doing annual Roth Conversion since 2016. My financial advisor recommended an amount based on my finances and income tax brackets at the time and I haven't varied from that amount (probably a mistake).  Going forward, I want to be a smarter about the amount. I've started a spreadsheet to help me do some forecasting scenarios, but it's not likely to be as sophisticated as incomeStrategy.com. I'll investigate.