RMD question

Investing Strategies Retirement Investing
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First I want to thank the board for your help on my previous questions.
My wife and I have been filing joined tax return.
I am 72 and she’s 70 so I will start RMD this year.
Questions:

  1. The RMD we need to take this year is just based on the balance of MY IRA on Dec31, 2021 and I only need to take RMD from my IRA, i.e even on joined tax return, RMD is just based just on my IRA balance and from my IRA account only. Is it correct that we do not need to do anything on my wife’s IRA ?

  2. To cover our living expenses, we use the money from our Social Security and from withdrawals from my IRA, we have not touched my wife IRA. We start to convert my wife IRA to Roth IRA (gradually). I think if we file tax as “married filling separately”, we can save on tax since we can control the RothIRA conversion amount each year so that we can keep her tax at a low bracket.
    I believe it is OK legally to do this but just want to confirm. Any down sides of doing our IRA conversion this way ?

Thanks

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The answer to your first question (assuming you have a traditional IRA) is a firm Yes. Only yours–since you’re the one who is 72–is involved in the RMD this year. It’s your income, and the fact that you file a joint return (as my wife and I do as well–I’m 80, she’s 70–so it’s only my IRA that is figured in so far)…the fact that it’s a joint return doesn’t affect whose IRA is involved.

I have no experience with Roth conversion, so can’t speak to that.

mathetes

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The RMD we need to take this year is just based on the balance of MY IRA on Dec31, 2021 and I only need to take RMD from my IRA,

The “I” in IRA is INDIVIDUAL. So, yes.

"file tax as “married filling separately” Any down sides of doing our IRA conversion this way ?

AJ will probably come along and give a definitive answer. But I doubt that filing separate will result in a net advantage over MFJ. It’s easy enough to run a trial return with Turbotax to see. Hmmmm, if I remember right, TT will automatically suggest this if it is better.

We start to convert my wife IRA to Roth IRA (gradually).

If you are going to do this, just rip the bandaid off all at once. No reason to be more gradual than whatever will have you cross some breakpoint, where other income gets taxed heavier or some expense (Medicare premium) goes up.
The primary (only?) advantage of doing Roth conversions is if your current tax bracket is lower than your tax bracket will be later on.
Pay tax now instead of more tax later.
I think for most people, this advantage comes in when one spouse dies and the survivor get thrown to the Single filing category.

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I am 72 and she’s 70 so I will start RMD this year.

Since you are saying you will “start RMD this year” - I am presuming that you didn’t take an RMD in 2021? If that’s the case, unless your 72nd birthday was on or after Jan 1, 2022, you will actually need to take 2 RMDs this year - one for 2021, which will need to be taken by April 1, 2022 and one for 2022, which will need to be taken by Dec 31, 2022.

1. The RMD we need to take this year is just based on the balance of MY IRA on Dec31, 2021 and I only need to take RMD from my IRA, i.e even on joined tax return, RMD is just based just on my IRA balance and from my IRA account only. Is it correct that we do not need to do anything on my wife’s IRA ?

Yes, your RMDs are based solely on your IRA account balances. If you need to take an RMD for 2021, that will be based on your IRA account balance as of Dec 31, 2020. The RMD for 2022 will be based on your IRA account balance as of Dec 31, 2021. In the year that your wife turns 72, you will need to start taking RMDs from her IRA, based on her IRA balances. And those RMDs will need to be taken out before any conversions from her IRA are taken out.

2. To cover our living expenses, we use the money from our Social Security and from withdrawals from my IRA, we have not touched my wife IRA.

Okay, I’m confused - were you planning on taking the RMD in addition to the withdrawals? Because those withdrawals count toward your RMD requirement. If you turned 72 in 2021, to figure out if you actually took out your 2021 RMD already, you need to take your IRA account balance as of 12/31/20 and divide it by 25.6 (from Appendix B Table III in IRS Pub 590-B https://www.irs.gov/pub/irs-pdf/p590b.pdf ) and then subtract the withdrawals that you took in 2021 from that amount. If you didn’t take at least the RMD amount, you will have to take any difference out by April 1, 2022. Once you take that difference out, any additional withdrawals in 2022 will count toward your 2022 RMD.

We start to convert my wife IRA to Roth IRA (gradually). I think if we file tax as “married filling separately”, we can save on tax since we can control the RothIRA conversion amount each year so that we can keep her tax at a low bracket.
I believe it is OK legally to do this but just want to confirm. Any down sides of doing our IRA conversion this way ?

Have you actually run the numbers? MFS brackets are exactly half of what MFJ brackets are. So for her to stay in a lower bracket than she would be MFJ, you will end up being pushed into a higher bracket than you would have been if you were filing joint (not ‘joined’). Also, keep in mind that both of you must either claim the standard deduction, or both of you must itemize - you are not allowed to put all of the itemized deductions on one spouse’s return, while the other spouse claims the standard deduction. So if that was your plan to keep her in a low bracket, it won’t work.

I will also ask, as far as the conversions - does she already have a Roth IRA account that’s open and funded? Because if she doesn’t, even though she is over 59 1/2, she will have to wait until the account has been open for 5 years before she can remove money from the account without being subject to taxes and penalties. So, at this point, if she doesn’t already have a Roth IRA, it’s probably a little late to implement this strategy. I would instead suggest that any money that you need for living expenses over and above SS and your RMD, you should consider taking out of her IRA.

AJ

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Sorry I did not make it clear: I will turn 72 in July2022, so this is the first year I will take RMD.

Thanks for the suggestion of using TurboTax to compare joined return and separate return. Will try it.
BTW, we do the Roth conversion since we intend to pass on the converted Roth to our children, who have higher tax rate than ours.

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To aj485,

Thank you for your in-depth post. As I get closer to my RMD date, I’m going to keep this sort of information in mind.

It’s very complicated, but I think the most important thing is will it put me in a higher tax bracket? Guess I’ll have to get my own aj when the time comes.

–Linda

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Another couple of points you might want to consider with this being your first RMD year.

You must withdraw the RMD amount before you do a Roth conversion, as the IRS will consider the first dollar out in 2022 to be part of your RMD and no part of the RMD may be converted to a Roth IRA.

If you do not require any or all of the RMD amount to actually live on, and you make charitable contributions each year, you might consider contributing some/all of the RMD to the charities you’d normally be contributing to, called a Qualified Charitable Distribution. Your IRA custodian should have a process by which you identify the charity and the amount you wish to donate, and the IRA custodian will issue a check made payable to the charity. These amounts will count towards your RMD and you are not required to include them as ordinary income on your annual tax return, thus from a tax standpoint, they are equivalent to taking a tax deduction for the contribution.

BruceM

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Sorry I did not make it clear: I will turn 72 in July2022, so this is the first year I will take RMD.

Okay, that’s a lot different than saying “I am 72” - especially in the first few days of the new year. Note that the IRS has updated the life expectancy tables for 2022, so your RMD for 2022 will be 3.65% (1/27.4 years) of your account balance as of 12/31/21. The IRS hasn’t updated Pub 590-B with the new tables yet, but if you google, you can find them pretty easily. Here’s one source https://thefinancebuff.com/new-rmd-tables-2022.html#htoc-new…

Thanks for the suggestion of using TurboTax to compare joint return and separate return. Will try it.

There, fixed that for you. If you are using TurboTax for 2021 returns (the one that’s available now) to model your 2022 taxes keep in mind a couple of things:

  • The updated RMD tables (see above) make the RMD lower than it would have been in 2021 for the same age and account balance.
  • The tax brackets and standard deduction have increased for inflation, which will allow you more income to stay in the same tax bracket.

BTW, we do the Roth conversion since we intend to pass on the converted Roth to our children, who have higher tax rate than ours.

But will you still be in a lower bracket if you add the conversion income plus the taxes you have to pay on that income, whether you file separately or jointly?

As already mentioned, the brackets and standard deduction for MFS are halved from the MFJ numbers. So, filing two separate returns is unlikely to result in paying less in taxes than filing jointly. Depending on the split in income, you could actually end up paying more. For example, if you have a total of $120k in ordinary income (SS plus IRA withdrawals), split $80k for one spouse and $40k for the other spouse, MFJ using the standard deduction would result a tax liability of $11,936 Filing separately, spouse 1 ($80k) would have a tax liability of $10,348, which is only $1,588 less than their joint liability. Then, Spouse 2 ($40k) would have a tax liability of $1,808 That means that their total liability is $12,176, or $240 more than their joint tax liability would have been. That’s because filing separately, Spouse 1 had more income taxed in the 22% bracket, than their joint return did, and even though Spouse 2’s income was in a lower bracket, it wasn’t low enough to offset the extra taxes Spouse 1 owed.

AJ

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