Ask the grumpies: Required Minimum Distributions? (RMD)

First Generation American asks:

Have you done the calculation yet of projected RMDs at 70.5? Conventional wisdom used to be to max out pre-tax income in your retirement accounts but now as we get closer to retirement, I am realizing my RMDs in my 70s may put me in the same tax bracket as I am in now. As a high earner, how do you decide your pre-tax vs after tax contributions into savings and has your opinion about it changed. Most early retirees in podcast interviews lately are talking about wishing they put more in roth when they were younger.

We are not professional financial planners.  Please talk with a fee-only certified planner and/or do your own research before making important financial decisions.

For us, the RMDs (Required minimum distributions, note that it may be 72 for us, not 70.5) seemed kind of irrelevant because academic economists never seem to stop working and they have high salaries so I just assumed that we’d be in the same or higher tax bracket later.  PLUS I’ve assumed that marginal tax rates will be higher because they’ve been historically low and we’ve been doing a lot of borrowing against our futures (and for us Gen Xers, Boomers will still be around much of our post-work lives, but not working themselves).

All of our IRA stuff is in Roth. We have it that way because we want to do backdoor Roth conversions (now, with the stock market down, is a good time to do that if it’s something you’ve been putting off), and the math is just way easier if you don’t have any IRA stuff in traditional accounts.

We do have some 401K stuff in traditional.  Looking at what we have in traditional using this calculator, RMDs don’t by themselves put us in the same tax bracket.  But.. we’ll have social security and probably dividends, and one or both of us may be working, who knows.

How do we decide which– well, at first we didn’t have Roth options, so we had to put $ in traditional.  Then Roth seemed like a good idea because I figured we’d be earning more later and tax rates were historically low.  Then Trump got elected and I switched everything to traditional in protest (pay taxes later).  Then Biden got elected and I can’t remember if we’re 50% Roth or 100% Roth in our 403b/401k.  I think my 457 only has traditional options. Obviously it’s not something I spend a lot of time thinking about!

To be honest, I went to a lot of talks by economists who study these specific questions and realized that there’s just too much uncertainty about the future to make a 100% good decision (I had originally thought:  Oh everything should be in Roths! and then I went to a talk where an economist suggested that they could renege on the Roth promise(!)).  Having our IRAs completely Roth and our 401k/403b as a mix without worrying too much about it seems to be working for us.  Everything else is kind of second order tinkering (like:  you end up investing more with one than with the other because of pre-tax vs. post-tax) and trying to predict increasingly unknowable future political environments.

Grumpy Nation, what is your experience with required minimum distributions?  How do you decide between traditional and Roth accounts?


15 Responses to “Ask the grumpies: Required Minimum Distributions? (RMD)”

  1. revanche @ a gai shan life Says:

    I may be going about this entirely the wrong way but I assume that we’re at the peak, or around the peak, of our earning power now and our taxes are fairly high so I don’t see a real benefit in jumping through hoops to do backdoor Roth conversions at our current taxation level. I already have a mess with my IRA where I mixed post tax and pretax contributions, not in that order, though it’s maybe a tiny comfort that I couldn’t have avoided the mess since apparently even if I put them in separate IRAs, the IRS still treats all of them as a single pot. I don’t know, it’s confusing and annoying.

    In any case I have a tiny Roth but the current plan, maxing out the pre tax 401k and then putting everything else in the taxable brokerage, feels like the simplest path forward now and I’ll start to figure out the RMDs when I actually have time to think about it more in-depth.

  2. Alice Says:

    Not much experience with it, other than to say that it’s a good idea to automate the distribution when the time comes. With my mom, her primary caregiver–my aunt– had ongoing health problems of her own that climbed in 2021 and culminated with her death in the fall. What with everything going on, my mom’s annual distribution didn’t happen in 2021. The family realized the problem and got the 2021 distribution taken in 2022, but we’re still waiting to see if the IRS is willing to waive the penalty or not. (It was caught early, so: hopefully.)

    As a tangent:
    I don’t really put a lot of effort into finessing tax stuff, but–at any age– I very strongly think that it’s a good idea to automate what you can financially. And also make sure that you have a few trusted people who can access to the critical things if you’re in an accident or have a severe health crisis. Authorize them on your accounts, or make sure they know where to get your passwords (and which places exist for you to even need passwords!) We’ve run into several situations with my mom over the years where automation or a password would’ve saved a lot of complicated detangling after the fact.

    • nicoleandmaggie Says:

      Oh that’s interesting. I never really thought about how this actually gets done. So many of our accounts are scattered that this will likely be non-trivial for us.

      My mother says they have put into their will to hire Charles Schwab to untangle the mess of my father’s investing. All the information is there in filing cabinets, but going through them will be a huge hassle. Apparently this is a service CS offers for a fee.

    • nicoleandmaggie Says:

      Also very sorry for your loss. :(

    • Leigh Says:

      Automating is good! Another way to stay on top of it is to always take it in January rather than delaying it in the year since it’s so important to make sure it gets done.

  3. Matthew D Healy Says:

    Ours is mostly in traditional IRA that we pay somebody to manage and 401K with each of our current employers. I’ve also wondered about future tax increases that I think must happen someday, but who knows? Ten years ago I would have expected a big tax increase by now, yet that still hasn’t happened.

    In our case, a huge uncertainty is that I have stock options with my current employer, a Biotech startup. The options will either be worth very little or worth a great deal and of course nobody can predict which it will be for a Biotech startup! So we’re being quite conservative in how we invest our savings. I’m 6 and in good health, so I’ve probably got at least 10 more years working unless the startup does really well.

    A big chunk of my IRA is a lump sum that BMS put into my 401K when they switched from defined benefit to defined contribution: everybody who had been on the defined benefit plan for at least X years got a lump sum that they claimed was actuarially fair compensation for the sudden end in contributions to the defined benefit plan. I have no idea whether the amount was indeed fair, but in any case it’s a big enough part of our nest egg to merit prudent management!

  4. Katie D Says:

    About a year ago (at 40), I looked at my accounts (and spouse’s). If the pre-tax accounts did well (+7% per year growth), our RMDs (at 70-ish) would be more than we currently make.

    I think I would like to RE (at 50), but my spouse got a later start (yay engineering grad school!), and feels like they may want to work longer. So my idea of doing the ROTH ladder gets less effective, tax wise (we have post-tax accounts to bridge between the gaps).

    So, with the current tax brackets, I decided that maybe for the next few years (until the “Trump tax cuts” that actually affect us) go away, we pay the taxes now, and re-consider in a few years. So for spouse = ROTH 401K (and backdoor ROTH IRA), For my SEP-IRA, I paid the taxes to roll it into a ROTH IRA (mainly to keep my “traditional” IRA bucket empty, as my previous company had a 401K which is a mix of pre- and post- tax $$). Will we do this forever? Who knows, probably not.

    I know the math indicates that pre-tax is better, but as you said above, there doesn’t seem to be a clear picture on how retirement accounts in the future will be handled tax wise (and I don’t trust our legislators not to change the rules) . I doubt that any current ROTH $$ will have any issues, but the ability to put $$ in that kind of account might be more limited later.

    Will it work out? Here’s hoping!

  5. Leigh Says:

    I think it’s important to have a mix of pre-tax, Roth, HSA if possible, and taxable money when you get to retirement. It’s way too hard to predict otherwise what the best strategy is. In the 32+% bracket, I would favor pre tax, but also making Backdoor Roth IRA continuions if you can and after tax 401(k) contributions with in-plan roth conversions if it fits in your cash flow and your plan allows it. Tax diversification helps make your withdrawals more tax efficient by having that flexibility.

    Before age 72, I would do the following:
    A) Consolidate all of your pre tax accounts into one per person so you only have one RMD to take.
    B) Transfer any Roth 401(k) funds to a Roth IRA because a Roth 401(k) has RMD requirements, while a Roth IRA does not.

    I would either automate or take your RMD in January each year. If you don’t need to spend it, just transfer it in kind to your taxable account.

    A lot of this too depends on how long you think you will keep working at what income level. An academic who will work until 70 won’t have any room for tax planning in the early years of retirement, but that also means they don’t necessarily need/want to max out all of the retirement accounts they have access to.

  6. First Gen American Says:

    Scary thought about the tax rules changing for roth.

    Right now, I’m doing what Leigh is suggesting. Maxing out pre-tax and then doing after tax contributions to 401K on top that I’m backdooring to roth. Still even with that plan, my ratio is about 90% pretax/10% roth because I was not able to funnel that much to retirement until recently.

    All this talk about what to do with “extra money” will become irrelevant once college expenses kick in come 2023.

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