Ben Felix comments:
Only those with a timer running, which is connected to …
Seems like that’s what Dave is trying to get his followers to avoid, since he in the video he railed against ‘growing your portfolio’ in retirement. Funny that in the accumulation phase, he wants to count every penny, but once you reach retirement, he seems to want to spend every penny.
Yeah, I’d like to have some left to leave to my heirs. (Actually I’d like to leave them a bundle!)
And of course inheritance avoids capital gains taxes in taxable accounts. One of the best tax loop holes. Of course you can spend it down too, but then you have to pay capital gains taxes.
It is, but it is one I don’t expect to be able to use. 81% of what I have is pre-tax in an traditional IRA, the rest in a tax-free ROTH. That ratio will change just a bit before the year is out when I do a ROTH conversion up to around the limit of the tax bracket.
Upon further reflection (and a bit of googling and spreadsheet work) I can’t rule out taking advantage of the inheritance avoids capital gains taxes loophole. What did I miss before? RMDs. I haven’t reached the age of my first RMD quite yet, but it appears that when it starts the amount I have to take out will exceed my needs. So I’m likely to invest the excess it in a taxable account.
Under current tax law.
Don’t forget that with the TCJA provisions expiring in 2025, there is an incentive for Congress to make changes to tax laws. On the other hand, given that Congress can’t even meet their actual obligations of passing spending bills, and has resorted to picking physical fights, rather than legislating, it seems unlikely that they will manage to pass a new tax law, even with an incentive.
Today yes. Congress did indeed give us that loop hole for federal taxes. Congress can taketh away.
It is unimaginable to me the level of imbalance between income and spending will be solved only my spending cuts. Individual income taxes account for 55% of federal income. Social Security and Medicare taxes 28%. That leaves only 17% of federal income for business taxes, tariffs, leases, National Park fees, etc.
An alternative would be to use the excess to pay the taxes on a partial Roth IRA conversion. By doing so, you would decrease the money in your Traditional retirement accounts, which would decrease the amount subject to future RMDs.
The amounts will vary based on your personal situation, but say you have a $20,000 RMD but only need $15,000 to cover your costs. That $5,000 excess might be enough to cover the taxes on a $10,000 to $15,000 Roth conversion.
Note that the Roth IRA conversion would add to your taxable income for the year you take it, but in addition to reducing your future RMDs, that converted money would then not be subject to capital gains taxes or income taxes again (once you meet the qualifications to withdraw it tax free).
There are tradeoffs, of course. The conversion does add to your taxable income in the year you make it. In addition to the direct taxes, that could increase the taxes on your Social Security and also cause you to pay higher Medicare Part B premiums.
Still, if you’re in a situation where your early RMDs are more than you need, then your later RMDs could potentially be substantially more than you need. This is because your RMD percentage increases every year as you age, and the amount that remains in your Traditional retirement account can still potentially increase due to interest, dividends, and market returns.
Good ideas, Chuck. Today (pre-RMD) I do ROTH conversions, but the taxes are paid as part of the conversion, which is to say from the IRA. There should still be some gap between total income (SS + pensions + RMD) and a nasty tax bracket break that I can use for a ROTH conversion, and by paying the taxes from the excess RMD the ROTH conversion need not drain the IRA for taxes tool. I actually did something like that a couple of years ago when I had sold my house and was temporarily very much cash-rich.
My brother doesn’t participate here (as far as I know) but he reads it. I got an email from him yesterday warning me because of my post(s) up-thread. He warned me about IRMAA, which I’d never really heard of. After I did a bit of poking I found that the SSA just told me that next year I will be paying $174.70 for the Medicare Part B IRMAA based on your 2022 income tax return.
So you aren’t paying IRMAA. Here are the 2024 brackets that applied to your 2022 tax return, from https://www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles?_hsmi=278272844
So if you keep your 2023 MAGI (AGI plus any tax-free bond interest) at or slightly above the 2023 limit for your filing status, you should avoid IRMAA for 2025.
That said - if your RMDs are going to push you into IRMAA territory anyway, it might be beneficial to start taking the hit on IRMAA early, given that the brackets are scheduled to return to the higher rates in 2026: 22% will increase to 25% and 24% will increase to 28%, so anything taxed in the current 22% and 24% brackets will be higher starting in 2026, unless Congress changes the law.
I will point out that if you do decide to take the IRMAA hit and move up to a higher bracket, there is another gotcha to watch out for - NIIT (Net Investment Income Tax). It’s an additional 3.8% tax on any investment income (including capital gains, dividends and interest, but not including retirement plan distributions) above $200 for Single and HOH, and above $250 for MFJ.
The SSA says I am, and it matches the table you posted: Single, between 129k and 161k, paying 174.70. Did you mis-type? If not, I’m missing something.
No bond interest. For me it looks like staying below $161k would keep it from going up. I reach 73, and RMD age, in 2025.
Good to know. At the moment all my investments are inside the IRA and ROTH, but I could start having those if I invest excess RMD income when that starts.
$174.70 is the Medicare premium without IRMAA. The table says that the “Income-Related Monthly Adjustment Amount” to get to a $174.40 premium payment is $0.00 - so you’re not paying IRMAA.
As further evidence, from that same site:
says that the Medicare Part B enrollees premiums are $174.70 for 2024, an increase of $9.80 from $164.90 in 2023.
So, I guess I’m confused - are your premiums going to be $174.70 or something higher?
Edited to add: Okay, I think I see the issue - the IRMAA premium you’re paying is $174.40, on top of the $174.40 base premium. I got confused because I thought you were paying just the $174.40, not the $174.40 + $174.40
That said - if your RMDs are going to push you into IRMAA premium territory anyway, you will need to decide if doing the conversions early may still be worth it because of the bracket changes.
Sorry for the confusion. I only quoted the part specifying IRMAA. The complete section of what the SSA told me is as follows:
Your 2024 monthly deduction for the Medicare Part B premium is: - $349.40
— $174.70 for the standard Medicare premium, plus
— $174.70 for the Medicare Part B IRMAA based on your 2022 income tax
Thanks AJ, for everything you do here. I have learned so much from your answers.
Just to be sure I understand. The 4% rule says to withdraw 4% of your current balance, each year. So if the market tanks, so does your retirement income? If the market climbs, of course, so does your retirement income.
A rule like that, of course you never go bankrupt (you never withdraw more than 4% your balance…). But you could end up with a year (years actually) of not enough retirement income to cover your bills.
This is one way to use the 4% rule, but the classical version is almost the opposite: you start with a 4% withdrawal (say $40K on $million) and actually increase that amount each year by inflation (the following year you take $40K plus, for example, if 2.5% inflation occurred, you would add that to your withdrawal for that year). The portfolio is thought to survive this through most market dips and increases over time for at least 30 years.
As with most rules like this, there can never be perfection.
As @MataroPete already explained, that’s not the actual 4% rule that the Trinity Study and William Bengen proposed. They proposed that you start with a dollar amount of 4% of your portfolio and then adjust the dollar amount up/down by inflation/deflation each year. The press named it as the “4% rule” because they wanted a simple way to refer to it, and didn’t want to have to explain it. I would say that most of the reporters who refer to the 4% rule probably don’t understand it, and have the same perception that you asked about - thus perpetuating the misinformation.
No, if deflation happens, your retirement income goes down. If inflation happens, your retirement income goes up.
I would invite you to read the original Trinity study https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
It was an attempt to find a maximum safe withdrawal rate for up to 30 years, since, at that time, covering a period from age 65 to age 95 would cover most retirees. Just because you can take the maximum out doesn’t mean that you have to - you can always choose to take less, even if your portfolio has grown by more than that amount. But that leads to growing your portfolio in retirement - which is what Dave Ramsey (to bring this back to the original topic) seems to want to avoid. What he doesn’t seem to care about is that if you started with an 8% withdrawal rate in any year from 1926 to 1965, you would have run out of money in 30 years (or less) between 69% and 100% of the time, depending on your specific allocation. To me, that doesn’t sound like a very solid retirement plan.
Why bother with Ramsey’s 8% rule or Bengen’s 4% rule? Just use the IRS Lifetime Table. Find your age in the table and divide the age factor into your portfolio balance. This will provide more than enough income to pay for assisted living in your dementia addled old age.
You mean this table?
It starts at age 72. Some of us are quite a bit younger, lol
Though the 3.65% withdrawal rate at age 72 should work for us young ‘uns just fine.