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Correct on all accounts ! The real usable benefit of SS is far less for people that either made above the top 25% in the country OR saved and and lived frugally and took advantage of tax deferred savings. The government obviously feels that if you fit in to either one of the categories above, that you don't REALLY need to have SS, you could of done fine without it. But since you contributed more to it than the bottom 45%, that contribute next to nothing, yet get a much larger benefit payback compared to their contributions , you are entitled to a larger amount. It just requires you to live much much longer to even get out the money you contributed plus interest, compared to low income earners. Remember that the government never believes it's anyone's fault that they don't work, or contribute to the tax base , it's all unfortunate circumstances.
It was not a waste to defer taxes by saving in an IRA or 401k. You earned that money, and haven't paid taxes on it yet. The RMD is roughly 3% of the total, (there are many online R&D calculators to get anew actual amount), so you would never exhaust the principal if you just took RMDs . You either saved the money to use it in your retirement or to pass on to heirs . One or the other. So use it for what it is for.
Understand that I don't begrudge paying taxes, just begrudge paying more than my fair share or one cent more than required by law because the government wastes so dam much money. If I was a a mega millionaire I would donate to charitable causes in monster amounts, rather than give it to the government in taxes so they could waste it on another study about snails, or a bridge to nowhere.
The OP did not say that the tax on his RMD was 89%. It isn't . It's 25% or 28% plus his state tax. However because of that additional income, he now pays that same 25% on 85% of his SS, that he paid none on before the RMD, so the ACT of taking in more income, raised his taxes to nearly what his RMD is. IF you have that money, then you HAVE to pay the tax on it. Previously to taking RMDs, you enjoyed a low tax amount AS IF you were poor, but you aren't , so eventually you have to pay the piper.
If you have huge RMDs, and can't roll the amounts in to Roths for some reasons , your only other strategy is to cash in a ton of the IRA, pay the tax, then buy
after tax income vehicles that allow you to earn income with long term capital gains, so your tax bite is much less rather than leave it in the IRA, where it will continue to grow at a faster ratee, making your RMDS even larger, and paying the FULL tax amount on every dollar that comes out.
IRA are great for accumulating wealth but they SUCK for spending it. The sooner you have more of it converted to a Roth, the better off you will be because a Roth is GREAT for spending it, and it gives you a real time, no discussion amount of what you actually have, You never know what you really have Ina tax deferred IRA, because the spend able amount always depends on what the effective tax bite out of it will be at withdrawal, which can be anywhere in the future.
By the way, those are both excellent articles, Belladl that clearly explain both strategies and target victims. The hardest point to ever convince anyone on, is to defer SS and draw off tax deferred in lieu in order to reduce RMD. And if you are well above the income threshold for the tax torpedo then delaying to 70 is usually a loser, as less is left to your heirs, and the break even point in to your 90s where it doesn't do you any good.
Last edited by Perryinva; 05-27-2015 at 06:37 AM..
It seems to me that the only people who really have much leverage over the so-called tax torpedo are those who have AGI less than the top of the 15% tax bracket. Otherwise, whatever you'd do to minimize the impact of the tax situation in the future would just cause a comparably expensive tax situation now.
Wow. Thank you so much. Mostly you have confirmed that I am sunk. I may review the posts separately and try to address places where more explanation from me will clarify. But for now:
To those that seem to say, "Pay what you owe", I will say this is what hurts. I have friends that went through life spending like drunken sailors. Credit cards at the max continuously. Leasing fancy cars every three years. Weekly trips to the casino. While we scrimped and saved to max the 401k/traditional and Roth. I did all the maintenance on our vehicles (like changing a burned piston in my garage). Made them last 10 or 15 years, etc. I did all the house repairs, appliance repairs, etc.
Now those others have little or no MRD to worry about and are living like we are. They have as much spendable funds as we have. And all through life they were expending at many times our rate.
I have four grown children and I have been advising them to dump as much into their 401ks as possible. Maybe I need to rethink that advice.
Those are my first thoughts on these great replies. I am sure there will be more after I review and understand the Tax Torpedo.
Assuming you are single, in order to pay a federal tax of $300 (10% tax bracket), your AGI has to be in the area of $14,500, or thereabouts (less standard deduction of $7,500, personal exemption of $4k, leaving taxable income $3,000, resulting in a $300 tax (10% x $3,000)).
24 x $14,500 (AGI) is $348,000, not excessively large as retirement funds go on this forum.
RMD at even 3.8% is $13,224.
Even if your SS is $30k/yr, 50% of that is $15,000 plus $13,224, for a total of $28,224 combined/provisional income for SS taxability purposes.
Deduct $25,000 exclusion from $28,224, leaves you with $3,224 of SS added to ordinary income, for total AGI of $17,500.
Then, deduct $7,500 + $4k, leaves taxable income $6,000 x 10%, = $600 federal tax.
Additional $300 federal tax is 2.25% of your RMD.
Overall, I don't see how this puts you into anything other than a 10% tax bracket federally or creates any serious tax issue of consequence.
Married=larger SD and exemptions
SS income (your 30k estimate is ballpark) but much is not taxed.
Bottom line. When I take the MRD only 11 cents of each dollar can be spent.
I consider discussion that categorically labels those who have less money as those who spend "like drunken sailors" to be gross generalization that has no real place in consideration of figuring out your own answers to personal finance questions. Leave that nonsense to the politics forums and focus on what your best options are given the circumstances you face.
To the OP: You will only have 11 cents on the dollar, IF you just take out enough to cross the threshold. You need to actually take out much more and invest what you dont need in an after tax vehicle that provides you lower taxed income. That will reduce your RMDs, and give you more money to spend. The more you delay taking it out, the more in taxes you will pay, OR die before you use it.
I have tons of relatives, (in fact, almost all) that spend for today and worry about tomorrow, the day after tomorrow. You are delaying gratification and use of the money , while they choose not too. And my relatives, like yours, will never have the security in retirement that you paid for by saving as you (and I) did. You can be guaranteed that they will die broke, (or they have so much money it doesn't matter) or straining to make it to the end, while you will be stress free and leave money to your heirs, if you so choose. My wife and I want to, and will be able to, travel comfortably anywhere we want, and not have it affect out standard of living one iota. My relatives will never. Read both the articles posted by BellaDL. Well worth the time.
It seems to me that the only people who really have much leverage over the so-called tax torpedo are those who have AGI less than the top of the 15% tax bracket. Otherwise, whatever you'd do to minimize the impact of the tax situation in the future would just cause a comparably expensive tax situation now.
Bada Bing in many ways. I am becoming more of the opinion that much of our retirement thinking has a regional tint to it. I have noticed a similar pattern of thinking in many of the DC region posters along with some other areas of the country. I suspect that presence of a large number of pension eligible workers may contribute to it. Structured income for many of us is the priority and the ability to maximize it to what ever degree we want for us and our spouses a priority. MathJak and I have similar retirement incomes at this point but how we get there is night and day. His requires more work and strategic planning over the years and ours was as much about checking the annual statements and projecting ahead. His involves investments ours is independent of investments. I count my blessings that my SS is 85% taxable and that there is nothing I can do about. That means my fixed income stream from pensions and SS are over that threshold and I don't see how that can be a bad thing. The known and the unknown have different impacts. Where MJ and I have overlap and common interest is on the investment side and how to manage our portfolios tax consequences and all. Sorta nice problems to have
My situation is about the same as yours. Fixed "forced" income means I will always be at least in the 25% bracket, so the torpedo means nothing to me. SS will always be 85% taxed, so it's somewhat of an advantage to max SS income by delaying and drawing down IRAs to reduce RMDs. My FRA is 66 2/3s, so going much past 67 makes no sense as the gains are small and would just be invested anyway, as is most of my SS.
My situation is about the same as yours. Fixed "forced" income means I will always be at least in the 25% bracket, so the torpedo means nothing to me. SS will always be 85% taxed, so it's somewhat of an advantage to max SS income by delaying and drawing down IRAs to reduce RMDs. My FRA is 66 2/3s, so going much past 67 makes no sense as the gains are small and would just be invested anyway, as is most of my SS.
Thats why I asked in another thread how close you were to the DC area. I noted a lot of similarities and you sounded a lot like other folks in that area I know, read about, read from or comment in forums. Some very distinct and different mindsets out there. A publication could do a great comparison article of retirement plans comparing MJ and others on the one hand and folks like us on the other. I am 67 and was planning on taking at 70 but have second thoughts on the one hand but since I am getting spousal on my wifes what I am giving up isn't the full amount.
Can I roll parts of the Traditional IRA into a Roth even though I am 67 years old and have no income? I have a Roth already but maybe a second one for giggles.
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From the Origonal Poster
