Author Topic: Don't get stung on your first RMD  (Read 1970 times)

BTDretire

  • Handlebar Stache
  • *****
  • Posts: 2247
Don't get stung on your first RMD
« on: April 11, 2018, 08:34:12 AM »
Just reading about Roth Conversion and ran across some info about when to start withdrawing.

"When do you need to take your first RMD?
As the rule is written, you need to take your first MRD from your tax-deferred retirement accounts by April 1of the year following the calendar year in which you turn 70 1/2. For example, if you turn 70 1/2 on in January 2016, you'll have until April 1, 2017, before you'll be required to take your first RMD."

 BIG CAVEAT

"Two warnings about MRDs
While the rules permit you to wait until April 1 of the year following your 70 1/2 birthday to take your first MRD, that doesn't necessarily mean it's a good idea to do so.

To explain why, consider the following example. Let's say that you turn 70 1/2 this year (2015) and that you calculate your first MRD to be $50,000, which you decide to wait until the last minute to take, so April 1, 2016. Well, because you waited until the next calendar year, you'll have to take another MRD by Dec. 31 in to meet your 2016 MRD requirements. Assuming you'll have to withdraw another $50,000, this will leave you with $100,000 of taxable income for 2016, which is likely to catapult you into a higher tax bracket.

Just to put this in perspective, $50,000 in taxable income translates to $8,294 in federal tax liability, while $100,000 boosts this amount dramatically to $21,071. So, even though you're allowed to wait, it generally is a better idea to take your first MRD in the calendar year you turn 70 1/2."

Info from,
https://www.fool.com/investing/general/2015/09/29/mrd-requirements-for-your-retirement-accounts.aspx

 I was thinking I had 8 more years, but it's only 7!

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 2811
  • Age: 81
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: Don't get stung on your first RMD
« Reply #1 on: April 11, 2018, 08:56:15 AM »
I made sure to set up RMDs for my mom's accounts to come out each December, starting the year she turned 70 to avoid this double dip for the first/second RMD as I'd already puzzled out that scenario on my own - just dumb luck as I am still pretty new to this stuff, but I'm getting better about thinking of all the angles.

Another thing people don't think about generally... you can begin withdrawals in any amount any time after you turn 59.5 without penalties. So if you have room to pull that money out NOW from a traditional IRA/401k and it won't impact your taxable bracket significantly, you can and likely should be doing so to stuff as much as you can in your Roth if possible.

The thought behind this is that you can control the amount before the RMDs take over, so you can also reduce the amount you'll be required to take if you are already reducing the amount of the account(s) earlier than required.

So take a good hard look now while you still have several years before beginning. If you've got enough in there to push you WAY up on RMDs, might want to move some things around now to optimize your transfers and minimize the tax hit.

Livingthedream55

  • Bristles
  • ***
  • Posts: 434
  • Location: Massachusetts, USA
Re: Don't get stung on your first RMD
« Reply #2 on: April 11, 2018, 08:59:24 AM »
I made sure to set up RMDs for my mom's accounts to come out each December, starting the year she turned 70 to avoid this double dip for the first/second RMD as I'd already puzzled out that scenario on my own - just dumb luck as I am still pretty new to this stuff, but I'm getting better about thinking of all the angles.

Another thing people don't think about generally... you can begin withdrawals in any amount any time after you turn 59.5 without penalties. So if you have room to pull that money out NOW from a traditional IRA/401k and it won't impact your taxable bracket significantly, you can and likely should be doing so to stuff as much as you can in your Roth if possible.

The thought behind this is that you can control the amount before the RMDs take over, so you can also reduce the amount you'll be required to take if you are already reducing the amount of the account(s) earlier than required.

So take a good hard look now while you still have several years before beginning. If you've got enough in there to push you WAY up on RMDs, might want to move some things around now to optimize your transfers and minimize the tax hit.

Yup! I'm 59 1/2 next year and will convert from Trad to Roth each year (will only transfer enough to keep tax rate at 12%)

TheWifeHalf

  • Bristles
  • ***
  • Posts: 499
Re: Don't get stung on your first RMD
« Reply #3 on: April 11, 2018, 04:46:07 PM »
I have maternal and paternal grandparents that lived to their mid 90's, so TheHusbandHalf and I have to take that into account in our planning. He is now 62, Im 60.

He is going to stop work Jan 2019, and will get a half million lump sum pension payment, that will go into his tIra. He will not get Railroad Retirement (in place of  Social Security) until he is 66 and some months. Half of that will be taxed oh well, thats the way it is.

For the next 8 years the 22% tax bracket goes up to 165,000, so were planning on converting as much of the tIra to Roth, as we can hey, 3% is 3%! Our thinking, this money probably wont be used for 25 years, one of us will probably be dead (so taxed as a single) by then, and if were both gone, its better to leave Roth money to the kids.
We have a brokerage account well use to live on while converting.

After he takes RR, well probably only convert tIra as much as my share of the RR will pay in taxes.

If the money grows, we envision giving gifts to the kids (though they have no idea.)
We have really gone over this plan, knowing things can change yearly, but does anyone here see anything were missing?

Of course, things could very well change, well deal with that when it happens.

BTDretire

  • Handlebar Stache
  • *****
  • Posts: 2247
Re: Don't get stung on your first RMD
« Reply #4 on: April 13, 2018, 07:40:52 AM »
I made sure to set up RMDs for my mom's accounts to come out each December, starting the year she turned 70 to avoid this double dip for the first/second RMD as I'd already puzzled out that scenario on my own - just dumb luck as I am still pretty new to this stuff, but I'm getting better about thinking of all the angles.

Another thing people don't think about generally... you can begin withdrawals in any amount any time after you turn 59.5 without penalties. So if you have room to pull that money out NOW from a traditional IRA/401k and it won't impact your taxable bracket significantly, you can and likely should be doing so to stuff as much as you can in your Roth if possible.

The thought behind this is that you can control the amount before the RMDs take over, so you can also reduce the amount you'll be required to take if you are already reducing the amount of the account(s) earlier than required.

So take a good hard look now while you still have several years before beginning. If you've got enough in there to push you WAY up on RMDs, might want to move some things around now to optimize your transfers and minimize the tax hit.

 At 63 I'm ready to start Roth conversions. With the new 12% tax bracket, I think that will be as low as it gets, and I expect that bracket to increase in the future.  My wife continues to run our small business, so I cannot convert as much as I'd like, along with losing the kid deductions and some college tuition credits, my taxes are going up. It will be tough to stay in the 12% bracket.
 Another taxable income increase will be stopping SEP contributions when doing the Roth Conversions. It gets complicated:-)

 EDIT to add,
 Be aware that paying tax at a higher rate now on a Roth Conversion vs paying a lower rate later on a tIRA is a loser financially.
If tax rates are equal in both scenarios, financially it is a wash. However there are other good reasons for Roth Conversions, that may or may not be worth some additional cost.
« Last Edit: April 13, 2018, 07:47:14 AM by BTDretire »