UnThreaded | Threaded | Whole Thread (28) | Ignore Thread Prev Thread | Next Thread
Author: inparadise 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: of 75779  
Subject: RMDs for Roths? Date: 3/10/2014 10:11 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
http://www.fool.com/retirement/iras/2014/03/09/will-the-obam...

Dan notes that currently, those who have traditional IRAs have to start taking minimum distributions when they reach age 70 1/2, but there's no requirement for Roth IRA holders. But the Obama budget would impose the same rules on Roth IRAs, forcing retirees to withdraw tax-free money from their accounts even if they don't need it.

I can see the point of RMDs on the traditional IRA, so the gov't can get it's tax money at some point, but why on a Roth? I guess it really doesn't change my mind about maxing out Roth conversions, since an inherited Roth already comes with RMDs, but would requiring RMDs on a Roth at 70.5 really add that much to the gov't coffers?

IP
Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74477 of 75779
Subject: Re: RMDs for Roths? Date: 3/10/2014 11:44 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
but would requiring RMDs on a Roth at 70.5 really add that much to the gov't coffers?

It could make a small bit of difference - especially as 401k Roths continue to gain acceptance.

1. It could count against SS so that it is taxed at a higher rate.
2. It could be added to income for any other income-based federal benefits.
3. Any interest the monies make outside of the Roth would be taxed going forward instead of remaining in the account and growing tax free.

Print the post Back To Top
Author: rainphakir Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74478 of 75779
Subject: Re: RMDs for Roths? Date: 3/10/2014 12:06 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
It would also reduce the amount passed to beneficiaries.
Ralph

Print the post Back To Top
Author: inparadise 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: 74479 of 75779
Subject: Re: RMDs for Roths? Date: 3/10/2014 12:11 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
It would also reduce the amount passed to beneficiaries.
Ralph


Only in the form of the Roth. The kids can inherit stocks with a tax free step up in basis. And seriously, why do this when there is a perceived "crisis" in retirement funding? How would passing less on in retirement funds to the next generation help with said crisis?

IP

Print the post Back To Top
Author: jeffbrig Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74480 of 75779
Subject: Re: RMDs for Roths? Date: 3/10/2014 1:34 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Maybe they're thinking that some of that RMD gets spent. I.e. injected back into the economy? Can't say I really see the reasoning behind it either.

Print the post Back To Top
Author: GWPotter Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74483 of 75779
Subject: Re: RMDs for Roths? Date: 3/10/2014 5:35 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
IP proposals and fact are not the same thing. Reading this reminds of the story I read about the Indiana State legislature that passed a law in the 19th century saying the value of pi (the math constant) would be exactly 3. Some legislature's daughter was having trouble remembering 3.14159 accord to the story.

I have no doubt somebody proposed this. If it were fact the only result would be people would take their Roth money and stick it is an investment account. So like you say there really is not reason to do it.

Print the post Back To Top
Author: inparadise 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: 74484 of 75779
Subject: Re: RMDs for Roths? Date: 3/10/2014 6:52 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
IP proposals and fact are not the same thing.

Nor did I say it was so. However, one can get a gleaming of things to come by seeing how proposals are received.

Sure, it's early. Would you rather pay attention only after it was fact?

Frankly, I find it disconcerting that it was even proposed, mostly because I suspect there is some hidden agenda.

IP

Print the post Back To Top
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: 74485 of 75779
Subject: Re: RMDs for Roths? Date: 3/10/2014 11:40 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Most of the administration's "proposals" are designed to raise revenue (surprise!). The proposal that would likely raise the most isn't subjecting Roth IRAs to RMDs, but subjecting all non spousal inherited IRAs to the 5 year rule.

BruceM

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74486 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 12:47 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
BruceCM: "Most of the administration's "proposals" are designed to raise revenue (surprise!). The proposal that would likely raise the most isn't subjecting Roth IRAs to RMDs, but subjecting all non spousal inherited IRAs to the 5 year rule."

Has anyone seen data on the percentage of non-spousal beneficiaries actually "stretch" the inherited IRA?

The default rule is that all funds must b out withing five years after the year of death; the "Stretch" is the exception, and it requires commencing the RMDs by the end of the first year after the year of death. What percentgage actually do so?

Curiously, JAFO

Print the post Back To Top
Author: inparadise 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: 74487 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 1:02 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
...the "Stretch" is the exception, and it requires commencing the RMDs by the end of the first year after the year of death. What percentgage actually do so?

Out of us six siblings, only two took the inherited IRA. Of course, we were also the youngest and made the most money, so that was a huge plus for us. I would think that it would be tough to assign general significance on percentages, since whether you take it immediately or stretch it has most to do with one's specific circumstances.

IP

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74488 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 1:28 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
inparadise:

<<<...the "Stretch" is the exception, and it requires commencing the RMDs by the end of the first year after the year of death. What percentgage actually do so?>>>

"Out of us six siblings, only two took the inherited IRA. Of course, we were also the youngest and made the most money, so that was a huge plus for us. I would think that it would be tough to assign general significance on percentages, . . . ."

Not with respect to the question about changing the rules to increase federal revenue. If a large percentage of non-spousal beneficiareis are not using the "stretch" then abolishing the "stretch" would not raise that much more federal revenue.

Said another way, if only a small percentgage of most non-spousal beneficiaries are stretching withdrawals past five years per the "stretch" rule, how much more revenue would abolishing the "atretch" rule acutually raise?

Regards, JAFO

Print the post Back To Top
Author: inparadise 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: 74489 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 1:57 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Not with respect to the question about changing the rules to increase federal revenue. If a large percentage of non-spousal beneficiareis are not using the "stretch" then abolishing the "stretch" would not raise that much more federal revenue.

Said another way, if only a small percentgage of most non-spousal beneficiaries are stretching withdrawals past five years per the "stretch" rule, how much more revenue would abolishing the "atretch" rule acutually raise?

Regards, JAFO


Are you still talking about Roths, or have we switched the topic to TIRAs?

I totally get what you are saying, but if continuing on with the inherited IRA vs cashing it in really depends on the individual circumstances, unless you find a predictable trend then all you would get in a survey would be a snap shot in time, rather than a predictor of future behavior. Can you really extrapolate that data set forward, when there are so many variables involved with the individual choice? For example just in my family alone you had the following: N-stage cancer, underemployment and debt, kids' college tuition, under water home, impending retirement. These are a few reasons some of my siblings chose not to continue on with the IRA.

One requirement of a valid experiment design is to make sure that the data you collect actually addresses the hypothesis in question. I could be wrong, but I question that. Has there actually even been all that many IRAs that have been available to be inherited? It's still a relatively new product, one that required time to be built, and the passing on of the originator and their spouse. Add to that the general investor still trying to recover from the not so distant downdraft in the market that sent them scrambling out of their stocks at a low.

It would be a shame to see one of the few ways in which we have been encouraged to save be pulled from our tool belt, particularly amid the hue and cry about the "crisis" in retirement savings and the talk about a need to ween oneself off of the dependency on social security, particularly for the generation who recently started working.

I am looking very closely at where all this is headed to figure out how to advise our kids when they start having options for putting money away for retirement. One of the talking points has always been the IRA's use in inheritance. For us it made even the TIRA worthwhile, but without the stretch provision? Probably not.

IP

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74490 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 3:11 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
The default rule is that all funds must b out withing five years after the year of death; the "Stretch" is the exception, and it requires commencing the RMDs by the end of the first year after the year of death. What percentgage actually do so?

Good question. In my anecdotal experience, the major of clients I have in that situation do - but not all of them (problem less than half) continue to take ONLY the RMD after they start.

I encourage most to take the RMD and offset it with an increase in their 401k or TIRA and most will start doing that but the discipline to do it for decades appears to be lacking for most benes I have worked with. It seems the more affluent, the more responsible (shocker right?) the bene tends to be.

Print the post Back To Top
Author: inparadise 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: 74491 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 3:14 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
It seems the more affluent, the more responsible (shocker right?) the bene tends to be.

Or do the more affluent simply have more motivation to continue to shelter the funds from taxation, and other assets to use for their spending needs? Perhaps they are also better informed about their options and how keeping the Inherited IRA intact could benefit them. I would not be so quick to judge one as more responsible than another.

IP

Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74492 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 4:11 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
inparadise:

<<<Not with respect to the question about changing the rules to increase federal revenue. If a large percentage of non-spousal beneficiareis are not using the "stretch" then abolishing the "stretch" would not raise that much more federal revenue.

Said another way, if only a small percentgage of most non-spousal beneficiaries are stretching withdrawals past five years per the "stretch" rule, how much more revenue would abolishing the "atretch" rule acutually raise?>>>


"Are you still talking about Roths, or have we switched the topic to TIRAs?"

I thought that we were already on TIRAs. (;>)

"I totally get what you are saying, but if continuing on with the inherited IRA vs cashing it in really depends on the individual circumstances, unless you find a predictable trend then all you would get in a survey would be a snap shot in time, rather than a predictor of future behavior. Can you really extrapolate that data set forward, when there are so many variables involved with the individual choice?"

I think that it becomes a question of sample size and the potential application of the law of large numbers.

"For example just in my family alone you had the following: N-stage cancer, underemployment and debt, kids' college tuition, under water home, impending retirement. These are a few reasons some of my siblings chose not to continue on with the IRA."

I understand that the indidual decisions are each made for their own reason, but do not some other families also have terminal disease, underemployment and debt, kid's college tuition, or pending retirement?

"Has there actually even been all that many IRAs that have been available to be inherited? It's still a relatively new product, one that required time to be built, and the passing on of the originator and their spouse."

IRAs becaome available per ERISA in 1974 and much more widely available in 1981 under ERTA. http://www.forbes.com/sites/kellyphillipserb/2011/06/27/dedu...
401-k plans date from 1980-81 and generally became more avialble after the Tax Reform Act of 1984.
http://www.learnvest.com/knowledge-center/your-401k-when-it-...

Thirty plus years is not the longest time period, I agree, but I am not sure that it is still "relatively new".


"It would be a shame to see one of the few ways in which we have been encouraged to save be pulled from our tool belt, particularly amid the hue and cry about the "crisis" in retirement savings and the talk about a need to ween oneself off of the dependency on social security, particularly for the generation who recently started working."

I am not sure that using the general rule of all funds out within five years after the year of death (and eliminating the "stretch" provisions) pulls a tool from the tool belt. All of the tax advantages for the initial account owner remain the same.

"I am looking very closely at where all this is headed to figure out how to advise our kids when they start having options for putting money away for retirement. One of the talking points has always been the IRA's use in inheritance. For us it made even the TIRA worthwhile, but without the stretch provision? Probably not."

Why? I am curious as to your reasoning? Step-Up in Basis (assuming it does not get changed, again, or limited like in 2010)?

Regards, JAFO

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74493 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 4:17 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Hawkwin:

<<<The default rule is that all funds must b out withing five years after the year of death; the "Stretch" is the exception, and it requires commencing the RMDs by the end of the first year after the year of death. What percentgage actually do so?>>>

"Good question. In my anecdotal experience, the major of clients I have in that situation do - but not all of them (problem less than half) continue to take ONLY the RMD after they start.

I encourage most to take the RMD and offset it with an increase in their 401k or TIRA and most will start doing that but the discipline to do it for decades appears to be lacking for most benes I have worked with. It seems the more affluent, the more responsible (shocker right?) the bene tends to be."


While I do not disagree with the choice of "responible" - consider that it might have more to do with the marginal utility of each additional dollar to the respectice beneficiaries and Maslow's hierarchy of needs --- Physiological needs, Safety needs, Love and belonging, Esteem, and Self-Actualization.

Regards, JAFO

Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74494 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 4:54 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Or do the more affluent simply have more motivation to continue to shelter the funds from taxation, and other assets to use for their spending needs? Perhaps they are also better informed about their options and how keeping the Inherited IRA intact could benefit them. I would not be so quick to judge one as more responsible than another

Since this has been MY experience, there is no one more qualified than I to judge the reason for their excess withdrawals as I am the one meeting with them to assist with such.

Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74495 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 4:57 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
consider that it might have more to do with the marginal utility

Nah, more to do with simple delayed gratification.

Unless your financial plan includes an IRA inheritance (some actually do), then receiving such is an unanticipated windfall ... and that brand new 2013 truck is likely pretty far down on the list of "needs."

Print the post Back To Top
Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74496 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 5:44 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Unless your financial plan includes an IRA inheritance (some actually do), then receiving such is an unanticipated windfall ... and that brand new 2013 truck is likely pretty far down on the list of "needs."

I don't know how far up the affluence ladder your clients (or their heris) are, but for a certain chunk of people, RMD's are a nuisance they wish they could do without (hence strategies for Roth conversions) rather than something that will supply income for various needs/wants.

IOW, they could afford a brand new 2013 truck Just Fine even if their entire IRA (or inherited IRA if beneficiaries) was stolen from them by rabid weasels.

-synchronicity, I'll leave it to you to figure out how rabid weasels could steal an IRA.

Print the post Back To Top
Author: inparadise 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: 74497 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 7:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thirty plus years is not the longest time period, I agree, but I am not sure that it is still "relatively new".

I guess it's all relative. I didn't even think that IRAs were available to my parents, and wasn't sure how Dad got funds in one, but I guess they were working until something like '82. Being public school employees, they had annuities via TIAA Cref, (sp?) way earlier than most had access to tax deferred funds, but no SS.

I do still think it is relatively new given that I am part of the first generation that had these features widely available from the start, and I sure as heck at 50 am not ready to push up daisies!

I am not sure that using the general rule of all funds out within five years after the year of death (and eliminating the "stretch" provisions) pulls a tool from the tool belt. All of the tax advantages for the initial account owner remain the same.

If you are disciplined and invest with a view towards minimizing taxes, a regular account can accomplish similar benefits to an IRA without the restrictions. Yes, you can't day trade in those accounts without serious tax consequences. However the step up in basis will let your kids inherit tax free, (at least at our relatively modest levels,) and you retain control over when you cash in the stocks without those pesky RMDs. Further, the capital gains are taxed preferentially rather than at regular income. I have some bias, as we had very few years where we got the tax break for putting into a TIRA, but very long ago and now those investments and those of the 401K have grown to the point where we will pay a higher tax bill if we let it ride to 70.5 and RMDs, than had we simply put it in a taxable account. And the Roth was only available to us for a few years. Yes, too much money is a fine problem to have. We worked hard for it and saved hard for it, so no apologies here.

But times have changed. So for our kids why question tax deferred accounts? 401Ks up to match, fine. Better yet, hopefully Roth 401Ks will be available to them. Roths, great. Eldest at 19 already has about $12K in his, just started Youngest's with about $600 this year. If they can't take a Roth and only qualify for TIRA without tax break? Probably not. Keep it in taxable. This was our mistake, thinking we would be able to pass it on to the next generation in a tax advantaged manner. We are stuck now, and if I don't want RMDs to the extreme, we need to convert what we can to Roth before we take SS. Hopefully all this concern is noise, and it will not be our accounts that can not be inherited as promised, or they will be grandfathered, but the writing is on the wall for our kids.

We maxed out absolutely every tax deferred account we qualified for, and put some in taxable accounts. Would tell the kids at this point that if you don't get an up front tax break for your TIRA, if you don't get match for your 401k, keep the funds in a taxable tax managed account. Inheritability was the perk that made it a probable good move without really bothering to analyze it too much. Perhaps it never was a good move. Without the bridge, way less of a good thing given the alternative of a tax managed taxable account.

All things can change. You can only work with what you have available to you. Our primary goal is spending it all, even if that means paying for our eventual grandkids' college. That would be a pleasure.

Maybe I just need to get higher maintenance and spend more. It's hard to switch gears. We expect we will probably spend more later, when kayaking out the back yard or hiking up the mountain isn't all that feasible or attractive anymore, and will be replaced with trips to Paris and river cruises through Europe. By then we will feel more secure about spending more. In the meantime, let's hope I don't whack my head on a rock when my aging eyes mistake that rock garden for a wave train, and I bounce from boulder to boulder. Been there and done that...it's less fun than it sounds.

IP

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: inparadise 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: 74498 of 75779
Subject: Re: RMDs for Roths? Date: 3/11/2014 7:45 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
consider that it might have more to do with the marginal utility
...
Nah, more to do with simple delayed gratification.

Unless your financial plan includes an IRA inheritance (some actually do), then receiving such is an unanticipated windfall ... and that brand new 2013 truck is likely pretty far down on the list of "needs."


We've already talked with the kids about this. Told them that in the event we kick the bucket way earlier than we hope, they will inherit funds, much of which is in the form of IRAs. It is our hope that they will take the RMDs for their wants, keeping the bulk for their financial independence...providing many stories about how this helped us follow the path we wanted because we had assets to back us up if we lost that job.

Then again, our kids typically ate the cake first, saving the frosting for last. Delayed gratification seems to run in the family. Or maybe we've simply educated them.

IP

Print the post Back To Top
Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74499 of 75779
Subject: Re: RMDs for Roths? Date: 3/12/2014 9:18 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
If you are disciplined and invest with a view towards minimizing taxes, a regular account can accomplish similar benefits to an IRA without the restrictions. Yes, you can't day trade in those accounts without serious tax consequences. However the step up in basis will let your kids inherit tax free, (at least at our relatively modest levels,) and you retain control over when you cash in the stocks without those pesky RMDs. Further, the capital gains are taxed preferentially rather than at regular income. I have some bias, as we had very few years where we got the tax break for putting into a TIRA, but very long ago and now those investments and those of the 401K have grown to the point where we will pay a higher tax bill if we let it ride to 70.5 and RMDs, than had we simply put it in a taxable account. And the Roth was only available to us for a few years. Yes, too much money is a fine problem to have. We worked hard for it and saved hard for it, so no apologies here.

Your complaint seems to be that you never want to pay any taxes on that money, and I think that was never a likely scenario. You took the tax deduction when you made those contributions to the TIRA knowing that all those dollars would be taxable when they were taken out, and all at ordinary income rates. It was never supposed to be a free ride for those dollars, and you are now realizing that.

But times have changed. So for our kids why question tax deferred accounts? 401Ks up to match, fine. Better yet, hopefully Roth 401Ks will be available to them. Roths, great. Eldest at 19 already has about $12K in his, just started Youngest's with about $600 this year. If they can't take a Roth and only qualify for TIRA without tax break? Probably not. Keep it in taxable. This was our mistake, thinking we would be able to pass it on to the next generation in a tax advantaged manner. We are stuck now, and if I don't want RMDs to the extreme, we need to convert what we can to Roth before we take SS. Hopefully all this concern is noise, and it will not be our accounts that can not be inherited as promised, or they will be grandfathered, but the writing is on the wall for our kids.

I don't actually see this as being stuck. I see this as the time has come or is coming when you have to pay taxes on those dollars that you always knew would owe taxes when they came out of the tax-advantaged account. I don't see this as a change at all, and I have to say that I don't see the huge difference between you paying taxes on those dollars now vs. your kids paying taxes on those dollars later when they withdraw them. Either way, taxes have always been due upon withdrawal, and you will have the ability to pay those taxes from that money that is withdrawn.

I am not seeing this as some awful penalty that needs to be paid.

That said, I never put money into a TIRA as a contribution after the first year or two, but I have rolled money over from a 401k into the TIRA. And one of the reasons that I opted to keep the vast bulk of our savings in a taxable account was because I knew we'd be paying capital gains, and those rates (under current tax law - I can only plan for current law and can adjust when the tax laws change) are lower than paying ordinary taxes on money coming out of a tax-advantaged account.

Our primary goal is spending it all, even if that means paying for our eventual grandkids' college.

My college roommate's boyfriend-now-husband had a grandmother who was fairly wealthy. One thing that she did to minimize her estate was to pay the first year of college for every grandchild. I always thought that was a pretty neat idea, and I would love to be in a similar position when I have grandchildren attending college. Like you, though, we plan to spend every penny, and the kids consider their paid-in-full college tuition as their inheritance. Anything else will be gravy for them. And like you, realistically there will be something left over for them, and so perhaps we will also be paying for our grandchildren to attend college.

I do see all your concerns about minimizing taxes, and I do agree that that is a good goal. However, I would be careful about letting the tax tail wag the dog as you go through your planning.

We are a couple of years behind you as I plan to retire in 2017, so I'd love to see how all of this plays out for you, and hope you post more on your journey in planning for your retirement as well as how things work for you in the early years.

I am learning a lot from these discussions.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
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: 74500 of 75779
Subject: Re: RMDs for Roths? Date: 3/12/2014 2:05 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
The default rule is that all funds must b out withing five years after the year of death; the "Stretch" is the exception, and it requires commencing the RMDs by the end of the first year after the year of death. What percentgage actually do so?

The 'default' to the 5 year rule for individuals ended several years ago, and would only apply to those TIRAs where the owner died prior to his/her required beginning date.

For our clients IRAs are relatively large and so we are definitely NOT seeing a representative cross section of all TIRAs. But the 'stretch' is the rule for beneficiaries...or at least that's how they are counseled. Generally, the smaller the IRA balance and the younger the beneficiary, the more likely are withdrawals to exceed the RMD. But for working adults who are beneficiaries and don't require the income, it usually makes little sense to increase your AGI by 5 and 6 figure in one year for no reason...other than moving money out of a tax deferred account to one whos realized gains will be income.

For these individuals, making an inherited IRA, regardless of the age of the owner at death, subject to the 5 year rule would substantially increase AGIs and tax bills.

Something tells me this proposal was dead as it left the administration's office suite.

BruceM

Print the post Back To Top
Author: inparadise 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: 74501 of 75779
Subject: Re: RMDs for Roths? Date: 3/12/2014 3:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Your complaint seems to be that you never want to pay any taxes on that money, and I think that was never a likely scenario. You took the tax deduction when you made those contributions to the TIRA knowing that all those dollars would be taxable when they were taken out, and all at ordinary income rates. It was never supposed to be a free ride for those dollars, and you are now realizing that.

My "complaint," if I had one, would be that they changed the rules of the game well after the game started. But I am not "complaining," I am strategizing on how to make things work best for us.

I don't see this as a change at all, and I have to say that I don't see the huge difference between you paying taxes on those dollars now vs. your kids paying taxes on those dollars later when they withdraw them. Either way, taxes have always been due upon withdrawal, and you will have the ability to pay those taxes from that money that is withdrawn.

The change is that the kids might only get 5 years in which to withdraw the money and pay the taxes, rather than be able to save the funds for their own retirement and pull out only the RMD, as was the plan when we took the account out. Again, rules changed, eliminating a perk in the account that we valued, one of the perks we took the IRA out for, and may not have if it had not been there. We can't change our accounts, but are likely to encourage the kids to invest differently.


I am learning a lot from these discussions.

Me too. That is the goal, right? Can't say everything I put on these pages is well thought out, but I know I can count on others here to point it out when it's not.

IP

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74502 of 75779
Subject: Re: RMDs for Roths? Date: 3/12/2014 3:37 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
The change is that the kids might only get 5 years in which to withdraw the money and pay the taxes, rather than be able to save the funds for their own retirement and pull out only the RMD, as was the plan when we took the account out. Again, rules changed, eliminating a perk in the account that we valued, one of the perks we took the IRA out for, and may not have if it had not been there. We can't change our accounts, but are likely to encourage the kids to invest differently.

I see where you and I differ. I assume the rules will change over the course of my lifetime, and so I do my planning with the rules as they are, and adjust as time moves on and the rules change. You planned with the rules as they were, and may have thought that even if the rules changed, there might be a grandfathering of sorts, and so the rules you planned under would remain intact.

I also don't see the problem with the kids having to pull the money out of the retirement accounts within 5 years, paying the taxes on the distribution, and leaving that money to be invested for their retirement in their own taxable accounts. In fact, I'd argue that this isn't all that bad since they could manage it so that they are selling when they want, and only pay the tax-advantaged capital gains tax vs. the ordinary income tax on everything. And they would have a lot more flexibility in how they use the money including for things like a house purchase, sending their kids to college, or their retirement. They wouldn't be locked into only using that money for their own retirement or paying a penalty plus the taxes for withdrawing early for some other expense.

I expect my kids to manage/use any money we leave them as they see fit, and do not particularly care if they only use it for one purpose, such as their own retirement. They may have other more pressing or more desirable uses for that money than to wait until they are retirement age, and I have no desire to manage their money from the grave. If they want to build a nice bonfire with it and waste it like that, then that is up to them, but they'll also have the consequences of their actions in that the money will no longer be available for some other more fruitful need.

Can't say everything I put on these pages is well thought out, but I know I can count on others here to point it out when it's not.

This does tend to be one of the boards that I like because there are substantial discussions, and I learn a lot. I do hope to see that continue.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74503 of 75779
Subject: Re: RMDs for Roths? Date: 3/12/2014 4:21 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
I also don't see the problem with the kids having to pull the money out of the retirement accounts within 5 years, paying the taxes on the distribution, and leaving that money to be invested for their retirement in their own taxable accounts.

I have clients with over seven figures in their IRAs with only their daughter as their bene.

If both of them were to pass under this new rule, it would force their daughter to take over $200,000 a year for the next five years in taxable income when she does not need it and with no means to offset that income (she can only put $17,500 into her 401k), which would be highly punative not only on that income but the income she earns from employment.

Under current rules, she would only have to take out about 2.5% per year.

That is why this proposal is DOA.

Print the post Back To Top
Author: inparadise 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: 74504 of 75779
Subject: Re: RMDs for Roths? Date: 3/12/2014 4:48 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
I see where you and I differ. I assume the rules will change over the course of my lifetime, and so I do my planning with the rules as they are, and adjust as time moves on and the rules change. You planned with the rules as they were, and may have thought that even if the rules changed, there might be a grandfathering of sorts, and so the rules you planned under would remain intact.

Well, as you say, you do your planning with the rules as they are. We accumulated funds with one set of rules, but will be redeeming with the expectation that there could be changes that make our 401K/TIRA/401K rollovers less attractive and more likely to be used first, contrary to standard philosophy that encourages spending from taxable funds first. So yes, it becomes more attractive to keep our taxable funds, particularly now that we are not investing as aggressively, and spend our TIRA/401K funds first.

I also don't see the problem with the kids having to pull the money out of the retirement accounts within 5 years, paying the taxes on the distribution, and leaving that money to be invested for their retirement in their own taxable accounts.

OK, but how about when compared to receiving funds in a taxable account with a step up in basis, requiring no taxes? Which would you prefer to receive...something that you are required to pay income taxes at your current rate over at most 5 years, or something that you receive free of conditions where there is no income tax?

In fact, I'd argue that this isn't all that bad since they could manage it so that they are selling when they want, and only pay the tax-advantaged capital gains tax vs. the ordinary income tax on everything.

No, they would be limited to a 5 year time frame, a time frame not of their choosing in which they could be at a much higher tax bracket than we were when we took the tax break, and they would pay ordinary income, not cap gains. Or did I miss it in the article I linked where the TIRA would now be taxed at cap gains vs income levels?

They wouldn't be locked into only using that money for their own retirement or paying a penalty plus the taxes for withdrawing early for some other expense.

Nor are they currently with an inherited IRA. Currently the IRA I inherited from Dad gives me the option of cashing it in at any time free of penalty, but subject to my income tax rate. Or I can take only the RMD until such time as I decide to take it. This will be one pool of funds in addition to the 401K that we are going to use before DH turns 59.5. Choices are being restricted with this proposal, not expanded.

I expect my kids to manage/use any money we leave them as they see fit, and do not particularly care if they only use it for one purpose, such as their own retirement. They may have other more pressing or more desirable uses for that money than to wait until they are retirement age, and I have no desire to manage their money from the grave. If they want to build a nice bonfire with it and waste it like that, then that is up to them, but they'll also have the consequences of their actions in that the money will no longer be available for some other more fruitful need.

Agreed. Not going to haunt the kids if they don't follow through with my vision. However, the more often we put forward the idea of planning for FI, whether than means retirement or retaining the ability to flip your boss the bird and walk away at any time, the more likely they will get the idea. I would much rather they receive these funds as IRAs, but am willing to simply give them the taxed fund if that is what results in better return for them, and more choices. What I don't want to do is have them inherit funds that may require a tax hit of 30+%(state included,) when I could simply give them stocks/funds with a step up in basis at death.

At some point, you have no more control, and I will probably feel better about that when the kids get older. For now, we have more teaching to do.

IP

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: inparadise 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: 74505 of 75779
Subject: Re: RMDs for Roths? Date: 3/12/2014 4:51 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
That is why this proposal is DOA.

For now. I don't expect it to pass anytime soon, but by the time we pass??? Likely. Ants are always targeted by the larger pool of grasshoppers who want access to our food stores so they don't starve, and since the ants are the smaller category, in a democracy the grasshoppers will get their wish....assuming they can be bothered to vote.

IP

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (28) | Ignore Thread Prev Thread | Next Thread
Advertisement