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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75339  
Subject: IRAs & RMDs Date: 12/23/2010 9:35 AM
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Posting on a previous thread, I created a spreadsheet to calculate RMDs based on an annual rate of return, an IRA starting value and the table from this link: http://www.bankrate.com/finance/money-guides/ira-minimum-dis...

What is interesting is that the RMD never exceeds 10% of the IRA value at age 70 assuming a 6% return. In other words, if you started out with $500k in an IRA at age 70, the most you would be forced to take out of your IRA is $47,819 at age 94 (see table below).

Personally, I'm lucky enough to be in the 33% marginal tax bracket. With todays tax brackets, I would have to have an IRA value well over $2,000,000 to pay more marginal tax than I would pay to convert to a Roth today. Even then, the average tax paid on the highest RMD would be well below 33%.

Bottom line, I think too much concern is put on RMDs and some end up paying more in taxes to convert traditional IRAs to Roths due to that concern. Of course, tax laws will change in the future and that may be a good reason to convert.

-murray

	Dist			
Age Period RMD % IRA Value RMD
70 27.4 3.65% $500,000 $18,248
71 26.5 3.77% $510,657 $19,270
72 25.6 3.91% $520,870 $20,346
73 24.7 4.05% $530,555 $21,480
74 23.8 4.20% $539,620 $22,673
75 22.9 4.37% $547,963 $23,929
76 22.0 4.55% $555,477 $25,249
77 21.2 4.72% $562,042 $26,511
78 20.3 4.93% $567,662 $27,964
79 19.5 5.13% $572,080 $29,337
80 18.7 5.35% $575,307 $30,765
81 17.9 5.59% $577,215 $32,247
82 17.1 5.85% $577,666 $33,782
83 16.3 6.13% $576,518 $35,369
84 15.5 6.45% $573,617 $37,008
85 14.8 6.76% $568,806 $38,433
86 14.1 7.09% $562,196 $39,872
87 13.4 7.46% $553,663 $41,318
88 12.7 7.87% $543,086 $42,763
89 12.0 8.33% $530,343 $44,195
90 11.4 8.77% $515,316 $45,203
91 10.8 9.26% $498,320 $46,141
92 10.2 9.80% $479,310 $46,991
93 9.6 10.42% $458,258 $47,735
94 9.1 10.99% $435,154 $47,819
95 8.6 11.63% $410,575 $47,741
96 8.1 12.35% $384,604 $47,482
97 7.6 13.16% $357,349 $47,020
98 7.1 14.08% $328,949 $46,331
99 6.7 14.93% $299,575 $44,713
100 6.3 15.87% $270,154 $42,882
101 5.9 16.95% $240,909 $40,832
102 5.5 18.18% $212,082 $38,560
103 5.2 19.23% $183,933 $35,372
104 4.9 20.41% $157,475 $32,138
105 4.5 22.22% $132,857 $29,524
106 4.2 23.81% $109,533 $26,079
107 3.9 25.64% $88,461 $22,682
108 3.7 27.03% $69,726 $18,845
109 3.4 29.41% $53,934 $15,863
110 3.1 32.26% $40,355 $13,018
111 2.9 34.48% $28,978 $9,992
112 2.6 38.46% $20,124 $7,740
113 2.4 41.67% $13,127 $5,470
114 2.1 47.62% $8,117 $3,865
115+ 1.9 52.63% $4,507 $2,372
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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67924 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 10:14 AM
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Part of the worry about RMDs is that some poeple try to use IRA's for estate planning and there are a number of possible pitfalles with this.

I have occasionally commented that just like the kids who at the mythical Lake Woebegone who are "all above average", fewer people will have problems with excessive RMDs than worry about it now.

It would be interesting if you could look up the safe withdrawal rate at various ages to see when or if the RMD percent would be higher than the safe withdrawal rate.

One thing to keep in mind though is that if you are getting social security then the withdrawals from an IRA could cause more of your social security to be taxable too which would result in a much higher effective marginal tax bracket until you get to the point where all of your social security is taxed. For a good explanation of how social security is taxed see this link;

http://www.bogleheads.org/wiki/Taxation_of_Social_Security_b...

Currently withdrawals from a Roth do not cause more social security to be taxable.

Another thing is that it wasn't clear if your example was for a joint return which would have a lower joint RMD and the lower married filing jointly tax rates. If it was, you really need to calculate the numbers for both a couple and a surviving spouse since after one person dies, the survivor could be in a higher tax bracket and be required to take a larger RMD.


Greg

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67925 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 11:07 AM
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Good points, Greg. Indeed the marginal rate on withdrawals based on taxed SS income should be taken into account. Just a quick calculation based on the charts you linked, the effective tax rate paid on $55,838 of IRA withdrawals and $33,062 of SS income would be 16.8% ($9,363/$55,838) even though the marginal rate is 46.25%. This is still roughly half the tax rate I would pay to convert today. I also plan to take IRA distributions for a decade before I start SS.

And yes, my tax calculations are based on joint returns which could, of course, change.

-murray

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67926 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 12:30 PM
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Murray ... Wouldn't your marginal tax rate be 15%?

I have an Excel spreadsheet that I've built to determine my overall taxe and any estimated tax payments. I put the numbers in that you provided and 15% is the rate I show your last taxed dollar being taxed.

I also show that a $55k IRA withdrawal causes the maximum 85% of your SS to be taxed.

James

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67928 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 12:53 PM
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Murray ... Wouldn't your marginal tax rate be 15%?

I'm not sure, I was simply going off the Bogleheads site that was linked: http://www.bogleheads.org/wiki/Taxation_of_Social_Security_b...

-murray

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67931 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 3:38 PM
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Murray
Nice chart!

I think the real value of large Roth conversions while still relatively young (under, say, 55) is for estate planning purposes as well as for tax purposes.

If one does not need the income from a TIRA as they age, when they hit 70.5, they will have no choice but to begin withdrawals as there are no exceptions (except, I suppose, the 2009 tax year) to this rule. Under current rules, the retiree could direct the RMD (up to $100,000) to a charity without paying the tax...but assuming the retiree wishes to keep the $$ in his/her estates as a legacy, the cost of taking the withdrawals and then compiling these in some sort of asset-transfer structure, such as an irrevocable gift trust or POD brokerage account, will be the taxes paid on the mandatory withdrawals, which depending on the retirees marginal tax rate for Fed + State, could be 25% to 40%.

The Roth avoids this, by allowing tax free buildup to death and then tax free life withdrawals to the beneficiary, who has the option of removing the Roth's assets at whatever rate they wish providing they withdraw the required minimum each year.

BruceM

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67932 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 5:50 PM
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...which depending on the retirees marginal tax rate for Fed + State, could be 25% to 40%.

Indeed, though I've posted in the past that looking at marginal tax rates for IRA withdrawals doesn't really make sense. My wife and I have no pension to speak of so our "income" in retirement will come from IRA withdrawals and SS. As pointed out earlier, even with SS, I'll be able to take out $55k and pay under 17% federal tax on that amount. I could triple the withdrawal and still pay under 25% of the total in federal tax.

On the flip side, converting an IRA today would cost me 33%+ in federal taxes. I can definitely see that converting some of my IRAs to Roths after I'm retired and my income is lower, but I don't see how it makes any sense for me today other than the risk of tax rates going up.

-murray

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67933 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 9:10 PM
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When you are taking a RMD after age 70 1/2, I imagine that it has to go into a taxable account (.e.g. savings or investment). And since you've already (presumably) reached the point where 85% of your Social Security Benefit is taxed ... Wouldn't it make sense to withdraw an addition amount from your IRA, say just short of entering the next marginal tax rate, and roll that amount into a Roth IRA?

If that is permissable, doing so would lessen the negative affects of RMDs. Doing this year after year, one should reach a point that the RMDs are too small to cause SS to be taxed. And you could supplement those small RMDs with tax free money from your Roth.

Your thoughts please!!!

James

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67934 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 10:03 PM
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When you are taking a RMD after age 70 1/2, I imagine that it has to go into a taxable account (.e.g. savings or investment).


correct

And since you've already (presumably) reached the point where 85% of your Social Security Benefit is taxed ...

i think that (SS fully taxed) depends on the numbers
(eg ..my SS was about 50% taxable last year .. google for "Social Security Bebefits Worksheet" <g>)


Wouldn't it make sense to withdraw an addition amount from your IRA, say just short of entering the next marginal tax rate, and roll that amount into a Roth IRA?

If that is permissable, doing so would lessen the negative affects of RMDs. Doing this year after year, one should reach a point that the RMDs are too small to cause SS to be taxed.


again, depends on the numbers .. lessen yes, "too small" ..not so much
(starting with a very large IRA, doing RMD and small conversion .. IRA and RMDs stay large )

*i* see it (doing partial conversions) as a way to lessen RMDs (and taxes), but don't expect they'll ever go away
and ,as mentioned by someone else, for 'estate planning' ..


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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67935 of 75339
Subject: Re: IRAs & RMDs Date: 12/23/2010 11:12 PM
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Wouldn't it make sense to withdraw an addition amount from your IRA, say just short of entering the next marginal tax rate, and roll that amount into a Roth IRA?

As the previous poster said, it depends. If your IRA value is less than $1M at age 70-1/2 and your only other income SS, then I would say no, you would be paying more in taxes (your IRA RMDs should never exceed $100k and the net rate of tax paid on the withdrawals would be below 25%).

I think it would make more sense to start converting or taking withdrawals from the IRA as soon as your income drops you below 25% marginal tax rate since that should be the highest rate most people would pay, even with quite large IRAs.

-murray

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67950 of 75339
Subject: Re: IRAs & RMDs Date: 12/27/2010 1:04 PM
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Murray,

The table you came up with to show RMD withdrawal rates from IRAs and how an IRA behaves when compounding at 6%, while at the same time supporting minimum distributions, is interesting and useful. I note that 15 years out the IRA is still larger than it is at the start of distributions at age 70.

Of course we are positing a 6% return during drawdown.

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67967 of 75339
Subject: Re: IRAs & RMDs Date: 12/27/2010 6:38 PM
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The table you came up with to show RMD withdrawal rates from IRAs and how an IRA behaves when compounding at 6%, while at the same time supporting minimum distributions, is interesting and useful. I note that 15 years out the IRA is still larger than it is at the start of distributions at age 70.

Of course we are positing a 6% return during drawdown.


Yes, I thought it was interesting as well. Reading about all those wringing their hands over RMDs makes me wonder how many people have actually looked at the RMD tables. For example, you don't have to take out more than 6% until age 83.

I've often said that if RMDs force me into paying higher taxes than I'm deferring now, I'll be very lucky indeed :)

-murray

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67969 of 75339
Subject: Re: IRAs & RMDs Date: 12/27/2010 6:58 PM
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Yes, I thought it was interesting as well. Reading about all those wringing their hands over RMDs makes me wonder how many people have actually looked at the RMD tables. For example, you don't have to take out more than 6% until age 83.


but 6% of a zillion is a lot!




I've often said that if RMDs force me into paying higher taxes than I'm deferring now, I'll be very lucky indeed :)



ditto


if the RMD is big enough .. your SS gets 'fully' taxed, you might have to pay the extra for Meidcare, might even hit AMT -- so it CAN be much worse than just a higher bracket.

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67973 of 75339
Subject: Re: IRAs & RMDs Date: 12/27/2010 7:39 PM
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if the RMD is big enough .. your SS gets 'fully' taxed, you might have to pay the extra for Meidcare, might even hit AMT -- so it CAN be much worse than just a higher bracket.

That would have to be a several million dollar IRA at age 70 assuming current tax rates.

Regarding SS being "fully taxes" the effective tax on the IRA is still half of what I'm paying now...so bring it on!

-murray

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67976 of 75339
Subject: Re: IRAs & RMDs Date: 12/27/2010 9:16 PM
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That would have to be a several million dollar IRA at age 70 assuming current tax rates.

OK
i've never calculated it ..

just knew it was far beyond me


..so yeah --Bring it On


(>:

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68015 of 75339
Subject: Re: IRAs & RMDs Date: 12/29/2010 5:42 PM
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.... I've often said that if RMDs force me into paying higher taxes than I'm deferring now, I'll be very lucky indeed :)....

As I recall in "game theory" analysis when making a choice, in addition to looking at which choice is more probable, you also look at the consequences of making the wrong choice.

If it turns out the Roth would have been a better choice and you pay more taxes, then the consequence might be that you have to take a shorter cruise.

If it turns out that the traditional IRA would have been a better choice because you could have more money in the IRA, then the consequence could be that you are short of money in retirement.

Greg

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68016 of 75339
Subject: Re: IRAs & RMDs Date: 12/29/2010 5:50 PM
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>> As I recall in "game theory" analysis when making a choice, in addition to looking at which choice is more probable, you also look at the consequences of making the wrong choice. <<

Yep. Another way to look at it is this: I don't invest in way that maximizes my expected portfolio size when I retire; I invest in a way that minimizes my chances of falling short of what I need. These are two very different goals.

#29

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68020 of 75339
Subject: Re: IRAs & RMDs Date: 12/29/2010 8:00 PM
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Yep. Another way to look at it is this: I don't invest in way that maximizes my expected portfolio size when I retire; I invest in a way that minimizes my chances of falling short of what I need. These are two very different goals.

Indeed! The scenario that prompted my OP was to spend 10s of thousands of dollars now to convert an IRA to a Roth in order to save in taxes later, though I still think more would be lost to taxes.

Once you've paid the taxes for a conversion, the money is now out of your hands. If the investment goes down in value, you've not only lost the value, but also the taxes you paid.

-murray

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