Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
RMD Strategy
Posted by: statsguy, February 13, 2013 06:30PM
Hi all,

I am looking for a strategy (or information) on how to reduce our RMDs when we turn 70.5 (in 2024). When I search for RMD Strategies I get information on how to manage them once we are 70.5 but I am looking for strategies that begin before RMDs begin.

Our situation. We are both retired and will both be 59.5 next year. We do not need to make any withdrawals for income from our RMD-accounts (by that I mean our 401k, 403b, 457, and traditional IRAs) as we live off the dividends from our taxable account and a pension. Our taxable gross is usually near $90K. We plan to wait until we are 70 before drawing Social Security.

In 12 years, when we begin taking RMDs, our income from social security, pension, dividends, and RMDs will be around $240K. To estimate our income I assumed 3% inflation and 5% return our investments.

So the big question... what is our best strategy for reducing future RMDs. I am not even sure where to begin.

I have some part-time income for the next five years and will fund our ROTH contributions from our traditional IRAs. The TIRAs are our smallest RMD-accounts and after three or four years of withdrawing our ROTH contribution from them they will be empty.

Another idea, is to fund repairs and improvement to a rental house we own with withdrawals from our IRA. That way we will not pay taxes on the full withdrawal as we can deduct some of those expenses on our taxes.

We are currently in the 25% marginal bracket, thus I think it makes sense to convert some our 457 to ROTH each year up to the next tax bracket increase (approximately $45,000). I have always thought that delaying taxes always makes sense, but I am beginning to think that paying taxes now at 25% is better than paying at at 28% (or 33%) rate in 12-years makes more sense. We also have a state marginal tax rate of 5.75%. I also think I will save more than the 3% because our income will be lower in 12-years because the RMDs will be smaller and so maybe less of our social security will be taxed.

This is getting long but I wanted to give an accurate picture of our situation and plans.

Bottomline what kinds of things should I consider now to reduce taxes on our RMDs.


Re: RMD Strategy
Posted by: wpatch, February 13, 2013 07:00PM
Side note: your social security strategy is slightly inferior. When the higher earning spouse reaches full retirement age(66?), (s)he should file and suspend on his record. The other spouse would be able to file on his spouse's record. This would produce a "free lunch", the other spouse could collect 50% on his spouse's record from age 67 to 70, while both spouses will be able to collect SS on their own records at the full age 70 retirement rate.

Edited 5:05 pm EST to clarify points.

Re: RMD Strategy
Posted by: statsguy, February 15, 2013 03:02AM
Watch, yeah I know. The post was getting long in tooth. For our situation, I plan to file and suspend at 66 and my wife will then collect her spousal benefit. At 70 she will switch to her benefit and I will begin collecting mine too.

Can I assume from the lack of replies that there is no strategy beyond convert to ROTH when you can get a smaller marginal tax. I would plan to pay the tax with after tax dollars


Re: RMD Strategy
Posted by: caesark, February 15, 2013 02:35PM
You say no strategies "beyond converting to a Roth" as if it's the last crumb on the floor. For you, it is the "golden goose".

This is a service I specialize in with all my clients in early retirement. It is called long term tax planning. From now to age 70 you will enjoy the lowest marginal income rates for the rest of your life. If you carefully convert, convert & convert and recharacterize where appropriate, you can build a fortress of a balance sheet and a gigantic reduction of income taxes later in retirement, AND you can leave the absolutely most valuable asset in your estate for your children to enjoy tax free for the rest of their life.

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