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Fri Dec 20, 2019, 02:34 PM

About those RMDs (for the 70+ here)

Some years ago, after reading a story, we opened Roth IRAs and moved some funds from traditional IRA to lower the amounts that would be used for RMD (Required minimum withdrawal). Did it for two years but then realized that, hey, I don't need to reduce the amount of the IRAa; the withdrawal would be the amount to maintain our expenses.

But, the stock market has been going up and up. The Dow Jones is up 20%, NASDQ is 30%, I think. We are 50-50 so the value increased by 10% and after withdrawal of around 4% the funds are still 6% higher. Yes, I know, problems of the "haves," (until the market crashes..)

They yearly RNDs are calculated based on the value on Dec. 31st, and as we grow older, the denominator decreases.

We have had some unexpected expenses recently ($2,000 dental bridge repair) so decided to take more this month, above the minimum required. This should also reduce somewhat the amount required for 2020 and... I made sure that we are still at the 12% tax rate. One reason why I keep a spreadsheet year around, starting January.


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Reply About those RMDs (for the 70+ here) (Original post)
question everything Dec 2019 OP
James48 Dec 2019 #1
still_one Dec 2019 #2
question everything Dec 2019 #4
progree Dec 2019 #5
question everything Dec 2019 #10
progree Dec 2019 #11
question everything Dec 2019 #12
progree Dec 2019 #13
question everything Dec 2019 #14
progree Dec 2019 #15
question everything Dec 2019 #16
progree Dec 2019 #17
question everything Dec 2019 #18
progree Dec 2019 #19
still_one Dec 2019 #6
progree Dec 2019 #3
still_one Dec 2019 #7
progree Dec 2019 #8
still_one Dec 2019 #9

Response to question everything (Original post)

Fri Dec 20, 2019, 02:38 PM

1. Ah heck-

If you have any more problems, you can always give some of it over to me. Iíll be happy to take some of that capital gain off your hands. Just saying... 😊

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Response to question everything (Original post)

Fri Dec 20, 2019, 02:45 PM

2. The Secure Act which was passed by both houses of Congress raises the RMD age requirement

The Secure Act raises the required minimum withdrawal, or RMD, age to 72 from 70Ĺ. It is awaiting Trump's signature. So depending on your situation, you may not have to take the RMD in 2020.

There are also other things involved, such as elimination of the stretch IRAS

https://www.forbes.com/sites/jamiehopkins/2019/12/20/how-the-secure-act-will-impact-young-savers-and-investors/#95cce1710ea1

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Response to still_one (Reply #2)

Fri Dec 20, 2019, 02:50 PM

4. Would have hurt us. At 70 and 1/2 we retired and needed the RMD

to supplement Social Security.

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Response to question everything (Reply #4)

Fri Dec 20, 2019, 02:55 PM

5. You don't have any regular taxable accounts to withdraw from?

I wish my entire traditional IRA was converted to Roth, so that I had no RMD requirements (and thus not having to pay the full ordinary tax rate on every dime of the RMDs). And I would be withdrawing money for living expenses from taxable accounts. Thus not paying any taxes on the amount withdrawn. Oh, if I had to sell something with a capital gain, I would have capital gains taxes, but the CG rate is 0% for people in the ordinary 12% tax bracket.

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Response to progree (Reply #5)

Fri Dec 20, 2019, 10:27 PM

10. Yes, do. Most of it are securities that selling would generate capital gain

The only Apple products we have been using are desktop computer and laptops but... purchased 100 shares in 2004.. did lighten them after their split.

And the cash is for when we do need some infusion, will probably get a new car next year but without a five year loan.

Yes, I know. Many would love to have these problems but at least we are not dependent on taxpayers money. Hope not to..

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Response to question everything (Reply #10)

Fri Dec 20, 2019, 10:57 PM

11. How would you pay capital gains taxes if you are in the 12% ordinary tax bracket?

At that income level, the capital gains tax rate is 0%.

Whether or not you need money the size of your RMD or more (or less) for living expenses has nothing to do with the benefit (or not) of converting traditional IRAs to Roths. You pay your ordinary tax rate (12% you said in your OP) on every dime of that RMD whether you need it or not.

These are 2019 tax rates,

For married filing jointly:

taxable income (which is gross income - $24,400 standard deduction) is:
from $0 to $19,400: 10% tax bracket on ordinary income
from $19,401 to $78,950: 12% tax bracket on ordinary income
$78,951 to $168,400: 22% tax bracket on ordinary income
$168,401 to $321,450: 24% tax bracket on ordinary income
...

from 0 to $78,750: 0% capital gains tax rate
from $78,751 to $488,850: 15% capital gains tax rate
...

https://www.nerdwallet.com/blog/taxes/federal-income-tax-brackets/
https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/?trk=tax_sidebar_link

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Response to progree (Reply #11)

Fri Dec 20, 2019, 11:36 PM

12. Oh. But one first has to take all the RMD and then can take extra to convert to Roth

Perhaps this is what I should have done last week. Having more expenses this time of year I thought extra would be useful. We pay estimated taxes and do the last ones in December, not January. Made sense before the "tax reform" when state taxes were itemized.

Either way, the capital gain would be from a different account, held by a different brokerage firm.

Will take a closer look in 2020.

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Response to question everything (Reply #12)

Sat Dec 21, 2019, 12:04 AM

13. Good luck 😂. I have to make my Roth conversion decision (yes/no/how much) in a few days

and I'm thinking of "no" and when I have to start taking RMDs in 4 years when I reach age 72 (assuming orange-shit-gibbon signs the SECURE act), to just donate those to charity directly via Qualified Charitable Distributions. But I will try to take a quantitative look at it soon soon. Fortunately, I've managed to whittle my traditional IRA down over the past 2 decades (via Roth conversions) to about $85,000, so the RMDs will be small for many years.

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Response to progree (Reply #13)

Sat Dec 21, 2019, 03:50 PM

14. To add and to thank you

First, if there is capital gain it would be added to total income Line 13 Sch. 1.

But... this discussion sent me to look at the worksheet for qualified dividends where one would also calculate the various taxes on capital gain and provides the tax amount. Since we did not have capital gain I ignored this worksheet but, of course, we do have qualified dividends from the taxable account so I went back and, lo and behold, lowered the taxes.


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Response to question everything (Reply #14)

Sun Dec 22, 2019, 12:03 AM

15. I'm glad I helped in some way 😁

First, if there is capital gain it would be added to total income Line 13 Sch. 1.

Yup, it's certainly a factor in taxes. It definitely adds to the AGI. But for MFJ with taxable income below $78,570 in 2019, it shouldn't cause any extra taxes - the Qualified Dividends and Capital Gains Tax Worksheet should result in it not increasing taxes.

Though there are actually a couple of secondary effects that makes the above not completely true (thanks to the "stealth taxes" ):

(#1#) Cap gains also adds to the MAGI used for determining how much of Social Security is taxed -- a complicated worksheet. So you could end up with more of your Social Security benefits being taxed, which would increase your taxes. Ultimately the amount of Social Security that is taxed ends up on 1040 line 5b (2018 return)

(#2#) If one's AGI is over $170,000 (in 2017, for MFJ couple, which would impact 2019 premiums), then one pays higher premiums on Medicare Part B and Part D. (The threshold is $85,000 for singles). As sinkingfeeling found out. For 2018 AGI (affecting 2020 premiums), the threasholds are $87,000 single / $174,000 MFJ. Similarly for Part D premiums - i think the same threshholds.


There are some other stealth taxes that go up with AGI, but at higher levels.

But... this discussion sent me to look at the worksheet for qualified dividends where one would also calculate the various taxes on capital gain and provides the tax amount. Since we did not have capital gain I ignored this worksheet but, of course, we do have qualified dividends from the taxable account so I went back and, lo and behold, lowered the taxes.


Wow! But how did you lower your taxes by looking at this worksheet?

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Response to progree (Reply #15)

Sun Dec 22, 2019, 02:17 AM

16. Qualified Dividends and Capital Gain Tax Worksheet

Like every form, you have to add and subtract and use numbers like $479,000 and then select the smaller of..

But bottom line is you reduce your taxable income by the amount of qualified dividends and you calculate the tax on both numbers and select the lower one. Until our exchange her I just applied the formula to the taxable amount but now I applied it to a lower amount.

And, one is supposed to use the tax table on amounts less than $100,000 but I prefer to use the formula because, of course, this is the beauty of spreadsheets - you change one value and everything linked to it changes accordingly. The numbers are not that different and TurboTax will use the table.


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Response to question everything (Reply #16)

Sun Dec 22, 2019, 02:47 AM

17. But don't you use TurboTax and don't they get it right (as far as qualified dividends)?

Or are you talking about your spreadsheet that you use to estimate taxes ..

I have a rather rickety crickety spreadsheet for tax planning purposes ... yes I definitely use formulas rather than the full tax table! for projections. I'm about to get started on estimating my 2019 taxes (yes, I do pay estimated taxes quarterly, but don't do a full spreadsheet projection for that -- this year I'm just using safe harbor to pay the same as in 2018, so I'm sure I'll be owing in April. But need to do something accurate real soon to determine what impact a Roth conversion (must be executed by the end of this year or not at all) will have -- it might be a bad idea to do any conversion this year, even a small one)

Like every form, you have to add and subtract and use numbers like $479,000 and then select the smaller of..

Yes, they are ideal for automatons and impossible for human understanding.

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Response to progree (Reply #17)

Sun Dec 22, 2019, 03:05 AM

18. Don't like surprises. Certainly not where money is invovled

I will start with 2020 spreadsheet sometimes in January. To determine how to spread the amount of RMD's (we take it every month, amount and dates vary for when income and property taxes and long-term care premiums are due).

Thus for TurboTax I already have the numbers and, of course, will welcome their suggestions.

Still shudder to face the Minnesota convoluted system.

Oh, and by the way, after these last two days calculations I will rollover a very small amount to Roth. Will certainly keep it in mind for 2020.





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Response to question everything (Reply #18)

Sun Dec 22, 2019, 11:57 AM

19. Don't like surprises either, but whether I get a $2,000 refund in April or have to pay a $5,000

tax bill, or whatever, has no impact on my quality of life. It has far less impact on my financial situation than the usual swings in the stock market. E.g. a -4.75% total return of the S&P 500 in 2018, vs. about +20% in 2019 with a few days to go. (Though that example is quite a lot more than the usual year-to-year swing).

If I have to, I just sell some of a taxable bond fund to raise the money to pay the tax bill. And if I'm using the safe harbor provision (paying the same total amount of estimated taxes in 2019 that I actually paid in taxes in 2018), there's no interest or penalties.

I used to spend a lot of time doing good projections, but it's just gotten a lot harder in the last four years with some changes in my financial circumstances.

"Still shudder to face the Minnesota convoluted system."

I hope its easier this year -- the legislature did pass conformity legislation to make Minnesota taxes align more with the feds. We shall soon see how it works out.

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Response to question everything (Reply #4)

Fri Dec 20, 2019, 02:59 PM

6. The ideal situation is one invests in such a way that the investments generate interest and dividend

income so you don't need to dip into the principal

That requires a long term strategy for most people which involves investments over 20 years

Then ideally the RMD would be moved into a standard brokerage account, after appropriate taxes are paid, where that money would be used to buy income producing securities also



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Response to question everything (Original post)

Fri Dec 20, 2019, 02:49 PM

3. Still, if you need to withdraw money for expenses, you want to withdraw it from taxable accounts

and leave the tax-deferred (traditional IRAs) and tax-free (Roth) accounts alone. Let the magic of tax-deferred and tax-free compounding work for as long as possible.

BTW, people who have inherited an IRA have to take RMDs, no matter what age one is at. So its not just an issue for people over 70. (Though one can't convert an inherited IRA, or any portion thereof, to a Roth).

I've been converting parts of my traditional IRA to Roth almost every year since 1998.


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Response to progree (Reply #3)

Fri Dec 20, 2019, 03:11 PM

7. Also for inherited IRAs there are several ways to take those RMDs, including annuitizing them

I have also been doing what you are doing, slowing converting my traditional IRA to a Roth, though not as long as you have been doing.

The Secure Act, which will be part of the budget will also eliminate stretch IRAS, and other situations



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Response to still_one (Reply #7)

Fri Dec 20, 2019, 03:25 PM

8. Yes, another option that looks real good to me is just donating the RMDs directly to charity --

the Qualified Charitable Distribution thing. That way, I pay no tax on those, and the charity gets the full amount, tax free to them. And I satisfy the RMD requirement.

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Response to progree (Reply #8)

Fri Dec 20, 2019, 03:57 PM

9. Exactly, especially since for a lot of folks they can't itemize deductions, and this is a perfect

way to reduce you RMD

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