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FYI: Tax-deferred retirement saving isn't forever. At age 70 1/2, you must start withdrawing funds from 401(k) and IRA accounts. Yet many retirees find the required minimum distribution rules burdensome, and surprisingly large numbers would prefer not to draw down funds at all. Regards, Ted https://www.morningstar.com/articles/884105/should-rmd-rules-be-reformed.html
I could be wrong, but I believe Uncle Sam requires RMDs in order to collect on the deferred taxes. You don't have to spend your RMDs but you do have to pay the taxes.
59.5 & 70.5...what's up with these ".5''s?
"What I'd really like to at least do is get rid of the '.5,'" he says. "The 70 1/2 age causes a lot of confusion, especially for people born in June or July. We should just make it the year that you turn a certain age."
The Boglehead's Wiki has an interesting approach to retirement withdrawals called, "Variable Percentage Withdrawal (VPW)".
Variable percentage withdrawal (VPW) is a withdrawal method that adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of his portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.
The VPW method uses a variable (increasing) percentage to determine withdrawals from a portfolio during retirement. Each year, the withdrawal is determined by multiplying that year's percentage by the current portfolio balance at the time of withdrawal.
The VPW method and spreadsheet were collaboratively developed and improved by a group of Bogleheads®
@FO Members: bee brings up an interesting point. What I do is pay the taxes on my RMD and have the dollar amount transferred to our joint account at Morgan Stanley. Regards, Ted
March 2009 was a great time to convert a sizable chunk to Roth, pay taxes on rediculously low NAVs and stir the pot. The gift that keeps giving. Lemonade out of lemons. That kind of good fortune helps make up for a lot of other investing mistakes over the years. (I'm not recommending that now that markets are so bubbly.)
To the point here, if you have more than 50% of your retirement funds in a tax paid Roth, the tax hit from RMD is a lot easier to swallow. I suppose one might have so much saved up that the RMD (From traditional IRA) still more than meets their expenditures - so no need to withdraw any Roth money. Not the case here. And I'd somewhat question why anyone over 70 wouldn't be pulling more out and enjoying the money while they can.
@hank - your post is a bit confusing. It seems like you are suggesting that some RMD funds be withdrawn from a Roth account to minimize the tax consequences of other funds withdrawn from traditional IRA's. Is that correct? If so, why would one do that when the Roth contributions have already been taxed and the grow tax free? I might just be reading you wrong.
It seems like you are suggesting that some RMD funds be withdrawn from a Roth account ...
I don't think that's what I said. I'm saying that I take my RMD first every year from a Traditional (taxable) IRA. In my case it satisfies roughly 50% of my annual needs - sometimes less than 50%. The remaining annual needs for funds are met by pulling from my Roth (which is exempt from both RMD and taxation).
Everybody's situation is different. But in this case my tax hit is roughly 50% of what it would be if all my needs were being met by Traditional IRAs. Maybe a good CPA or tax attorney would recommend pulling everything from the Traditional and leaving the Roth untouched. I wouldn't understand viewing it that way - especially with the big gains the Roth has amassed since '09. But I will concede there's another side to the argument.
I could be wrong, but I believe Uncle Sam requires RMDs in order to collect on the deferred taxes. You don't have to spend your RMDs but you do have to pay the taxes.
IMHO that's a significant reason, but not the only reason. IRAs are intended for use in retirement, not as a permanent tax shelter or shelter from creditors.
That's why someone other than a spouse who inherits an IRA is subject to RMDs even if the IRA is a Roth. Allowing the beneficiary to spread the withdrawals over time via RMDs can be viewed as a form of income averaging which has appeared in the tax code in various forms in the past. (You spread you income over several years, or average it as though it were spread, so that you don't get kicked into a higher bracket simply because you received a pile of money at one time.)
A SC ruling a couple of years ago said that inherited IRAs don't get the bankruptcy protection that "regular" IRAs get. The court said that the protection is for retirement accounts, and inherited IRAs (unless inherited by spouse) are not retirement accounts.
I don't have time now to look closely into VPW but that sounds more like a withdrawal strategy (a la 4%) as opposed to an RMD strategy. I believe, however, that if you annuitize your IRA, the annuity payments (which can be based on balance and life expectancy for a VA, similar to VPW) will satisfy RMD requirements. Haven't checked this either.
Comments
59.5 & 70.5...what's up with these ".5''s? The Boglehead's Wiki has an interesting approach to retirement withdrawals called, "Variable Percentage Withdrawal (VPW)". https://bogleheads.org/wiki/Variable_percentage_withdrawal
Regards,
Ted
To the point here, if you have more than 50% of your retirement funds in a tax paid Roth, the tax hit from RMD is a lot easier to swallow. I suppose one might have so much saved up that the RMD (From traditional IRA) still more than meets their expenditures - so no need to withdraw any Roth money. Not the case here. And I'd somewhat question why anyone over 70 wouldn't be pulling more out and enjoying the money while they can.
Everybody's situation is different. But in this case my tax hit is roughly 50% of what it would be if all my needs were being met by Traditional IRAs. Maybe a good CPA or tax attorney would recommend pulling everything from the Traditional and leaving the Roth untouched. I wouldn't understand viewing it that way - especially with the big gains the Roth has amassed since '09. But I will concede there's another side to the argument.
Hope this helps?
That's why someone other than a spouse who inherits an IRA is subject to RMDs even if the IRA is a Roth. Allowing the beneficiary to spread the withdrawals over time via RMDs can be viewed as a form of income averaging which has appeared in the tax code in various forms in the past. (You spread you income over several years, or average it as though it were spread, so that you don't get kicked into a higher bracket simply because you received a pile of money at one time.)
A SC ruling a couple of years ago said that inherited IRAs don't get the bankruptcy protection that "regular" IRAs get. The court said that the protection is for retirement accounts, and inherited IRAs (unless inherited by spouse) are not retirement accounts.
I don't have time now to look closely into VPW but that sounds more like a withdrawal strategy (a la 4%) as opposed to an RMD strategy. I believe, however, that if you annuitize your IRA, the annuity payments (which can be based on balance and life expectancy for a VA, similar to VPW) will satisfy RMD requirements. Haven't checked this either.