RMDs are rising

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Many METARs are retired. To minimize taxes, we should pay attention to the Required Minimum Distributions from our IRAs years in advance.

Americans’ Required Retirement Income Has Never Been Higher

Fidelity expects IRA distributions for clients to reach $25 billion in 2024, which could have major ramifications

By Anne Tergesen, The Wall Street Journal, Jan. 4, 2024

…

Although tax brackets are adjusted for inflation, the market’s strong performance in 2023 means the higher RMDs will push some retirees into higher tax brackets. It will also require some to pay surcharges on future Medicare premiums, which are based on income. For others, the increases will trigger a 3.8% surtax on net investment income, which kicks in when modified adjusted gross income exceeds $200,000 for single people and $250,000 for married couples, thresholds that aren’t adjusted for inflation.

Also inflating RMDs is Congress, which recently raised the age at which people are required to start withdrawing money from tax-deferred retirement accounts to 73 on Jan. 1, 2023 from 72 and 70½ before that.

That gives investors who can afford to leave their retirement savings untouched the opportunity to let the money grow tax-deferred for longer… [end quote]

I began Traditional-to-Roth IRA conversions a few years ago.

A relatively new law allows tax exemption when an IRA distribution (up to $50,000) is donated to a Charitable Gift Annuity. This provides income as well as a tax exemption.

https://www.redcrosslegacy.org/charitable-gift-annuity2?scode=APP00001D002&gad_source=1&gclid=CjwKCAiA7t6sBhAiEiwAsaieYiYqdArAhzW9vwUFipgnOT-_gGGq8Bd9xL9rBM4VCUyH-IoqgTbnFxoC9_oQAvD_BwE&gclsrc=aw.ds

Wendy

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Yup. That is why I started chipping away at the IRA as soon as I could.

Steve

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Tying in this thread with the 4% rule thread. RMD’s still confuse me somewhat. But whenI look at Table III, at age 80 you have an entry of 20.2, which means you must withdraw at least 1/20.2 (or 4.95%) of your IRA. Which breaks the 4% rule. And it just gets worse from there on out. At age 93 you are taking out 10% per year minimum, for example.

Do I have this right?

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Just because you have to take the distribution, doesn’t mean you have to spend it. But you do have to pay the taxes on the income. You can reinvest whatever you don’t need in a taxable account, which becomes a part of your nest egg.

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RMD has no relationship to the 4% rule.

RMD simply means that you have to move the money from a tax-deferred account to a taxable account. That’s not a “withdrawal” in the sense of “safe withdrawal rate” (roughly 4% in most cases).

Withdrawal for the purposes of “safe withdrawal rate” means withdrawal from YOUR accounts to someone else’s accounts. Basically it is what you spend in the year, everything you spend, rent, food, entertainment, taxes, other housing expenses, medical expenses, etc.

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One might also note that the 4% rule is based on the expectation of withdrawing for 30 years. At 90, most people no longer have that expectation.

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Ayup. and divis and cap gains realized in a cash account are taxed at very favorable rates, while the same divis and cap gains, realized in the IRA, would be taxed as earned income, at much higher rates.

Steve

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Agreed. As I understand it, ir is worth noting that the 4% in the 4% rule is just for the first year, not every year. You increase the dollar amount after that to keep up with inflation.

Mike

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“Ayup. and divis and cap gains realized in a cash account are taxed at very favorable rates”

yup, you, me, probably everybody on this board has learned to play the game like the rich folk do, w2’s are for suckers,lol. Can’t shake this uneasy feeling that since so many of us regular folks are doing it, that TPTB are not going to let that go on for much longer.

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Rest easy. We’re not the droids they are looking for.

I can’t and don’t want to speak for all of us of course, but as a group we’re pretty much in the sweet spot. The Job Creators can’t really raise taxes on us without also raising taxes on lower income people, which is politically unpopular. And they can’t raise taxes on us without raising taxes on themselves, which they don’t like to do.

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The former JC Gov of Michigan had no problem raising taxes on retirees and the working poor, to help cover two rounds of tax cuts for the JCs.

Give me a moment, and I’ll find a way to vigorously roger middle class retirees, without laying a glove on the JCs…

…

…

Run the premiums on Medicare sky high, so they entirely consume most people’s Social Security payments. Won’t bother the “JCs” because they negotiated retiree health insurance from the company they ran, and SS benefits are fiddling small change compared to the income generated by the loot they extracted from the company.

Means test SS and Medicare. As described before, SS only payable to people who are too feeble to be of any use to a JC anymore, and a work requirement for the able bodied, regardless of age, to receive Medicare. Again, of no consequence to the JCs.

Change the rules on a Roth, so only the money originally paid in can be withdrawn untaxed. Impose taxes, at earned income rates on all the divis and cap gains that have been realized.

Permanently repeal the “JC” part of the FICA tax. (for those who didn’t notice, the COVID relief package in 2020 suspended the “JC” part of that tax temporarily, to “create jobs”). Cutting the FICA tax revenue in half would require draconian cuts in SS benefits, which are immaterial to JCs, but, giving them another tax cut would “create jobs”…right? /sarcasm

Given more time, I could think of more ways.

Steve

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“Means testing” is creative language for making Social Security a welfare program. When that happens political support wanes.

Its insurance. Everyone pays and everyone collects. That works politically. Making it a tax with no benefits is problematic.

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That is something that most SS critics overlook. Most people buy insurance and hope they will never have to collect. People who buy term life insurance do not buy it hoping they will die, or home owners insurance hoping they will have a fire, or auto insurance hoping they have an accident. Social Security is like an insurance and an annuity. Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), survivors’ benefits of a family member who has died are the insurance part of the system. Retirement benefits, that everyone hopes to receive, is the annuity part of the program.

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Then TPTB get what they want: loss of public support for SS and Medicare, so they can kill the programs, and pocket the money. Many of my 40-something coworkers were already convinced there would be no SS or Medicare for them, so the taxes they pay are a total loss.

To pass “means testing” sell it as “securing the social safety net for the truly needy”. By definition, the able bodied, regardless of age, are not “needy” because they can work for wages.

Steve

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Is this a one time thing or $50K/year?

IP

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The pros continue to tell us Social Security will run out of funds one day unless something is done. They say last time that was done in the Reagan administration. They appointed a commission to study the numbers and make recommendations.

I think everyone expects some adjustments. Increasing full benefits age, maybe increased taxes to cover. Many suggest removing the income cap so the well paid continue to pay the tax on the rest of their income.

Already most of us pay income taxes on 85% of our SS payments.

SS is usually regarded as the third rail of politics. Usually whatever changes are made they become effective years in the future. So the politicians involved are long gone when they become effective.

And of course the cost of living adjustment can be made less costly.

Its been pointed out before cutting benefits to retirees is painful for many. Better to increase the burden on those still working. They have time to make adjustments; retirees usually don’t.

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@inparadise one-time.
Wendy

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Depends on how you define “out of funds”. The last time I looked at official projections, as opposed to the bellowings of someone with an agenda, when the trust fund would be exhausted, the current FICA tax revenue would still cover 76% of scheduled payments. When I was in school, 76% was not equal to the zero that the bellowers were claiming.

Now, if TPTB made that 2020 Covid relief move permanent, and repealed the JC portion of the FICA tax (so the JCs would not be “burdened”), then, post trust fund, payments would be reduced by half, to 38% of scheduled benefits. When I was in school, 38% was not zero either.

Add in the bellowing of one of the anti-SS people, waving a binder, and saying “there is your trust fund, nothing but worthless IOUs kept in a file cabinet”. The pages in that binder are receipts for United States Treasury Bonds, backed by the “full faith and credit of the United States”, so hardly “worthless”. As I said, the doom and gloomers about SS have an agenda.

Things we can take as a given in Shiny-land:

-Increasing what employers pay in FICA tax is a non-starter. “Job killing tax increase” would be the opening gambit. Of course, the reality is that increasing either the tax rate, or the income ceiling for paying FICA tax is immaterial, compared to what Mexican labor is available at, vs USian labor, but the bellowers would not mention that.

-Increasing the income ceiling, so that “JCs” pay more of “their money” in FICA, even though SS is immaterial relative to the many millions they extract from the company, mostly in forms that are not subject to FICA, over several years as CEO, would bring howls, backed by piles of the company’s money.

So, we are back to Plan Steve: to maintain “full benefits”, without TPTB paying a nickle more, would be a means test, so only the “truly needy” receive benefits, while the able bodied, regardless of age, are disqualified, because they can continue to work to make the “JCs” richer. Note the increasing narrative of “the dignity of work”, translation being “you only exist to work”.

Steve

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With relatively more years out until RMDs become a factor, I have a slightly different set of concerns. One of mine is to figure out and plan for a better taxable, tax deferred and Roth ac allocation.

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And there’s no real reason why SS couldn’t be partially funded out of general revenues. I find it implausible that one day the gong will sound and everybody’s SS gets cut by 26%.

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