RMD strategy

I'd suggest looking at what your current marginal rate is, and doing a Roth conversion to "top off" that rate (i.e. convert enough to stay just within that bracket). Since a Roth conversion does not necessitate a sale, just movement to a different account, you don't have to worry about a buy/sell. This will lessen your RMDs and reduce the risk those RMDs push you into the higher bracket further down the road. See

for two delightful anecdotes on how I've used Roth conversions for those I've advised. JOE

You could "lock-in" todays "high" stock prices by buying your RMD in laddered bonds. For example if your RMD's begin in 3 years, you could buy individual bonds that mature in 3, 4, 5 ... years out. The amount for at maturityfor a specific year could be the RMD or the RMD plus taxes.

I like Joe's idea too.

Frank

DLC responds:

Thanks for your comments.

I guess I could have mentioned that I am 67, so there are only three years before RMD starts.

Also, The amount we have in traditional IRA and 403B accounts exceeds

1.75 million. We do have $200,000 in Roth accounts.

I have not been willing to convert to Roth accounts and paying the taxes now. I know that I will be in a much higher bracket when I do start the RMD, but I will also have (presumably) more investment value with which to pay the taxes.

DLC

======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

People may need to watch their RMDs now that medicare is means tested. A large RMD could quadruple the monthly medicare premium ($374 instead of $93). Currently this only affects 7% of seniors according to SSA statistics. But in the 2020s this may affect half of seniors beacuse the means formulas are NOT COLA-indexed. This would be an argument to for withdrawing earlier, though I havent crunched the numbers yet.

DLC, I'm wondering how you decided on this withdrawal approach, specifically the idea of taking your RMD early in the year only if your IRA declines in value. As you probably know your RMD amount is fixed as of 12/31 of the prior year, so any subsequent fluctuations in account value won't change the amount that you need to withdrawal. What your approach would do, as the years go by, is to shift some of your mutual-fund gains into a taxable account, when they could have happened within the IRA instead. Which could make sense, but is that your intention?

Also: why keep the same investments? One typical change would be to choose something slightly different based on tax considerations. For example, if you had the money invested in a bond mutual fund within the IRA, and wanted to keep it in bonds, you might change to a tax-exempt bond fund in the taxable account. There are some similar considerations with stock mutual funds -- using tax-inefficient ones within the IRAs, and the more tax-neutral ones in the taxable accounts.

-Tad

That is my intention as capital gains are likely to be taxed less than normal income rates for the IRA RMD.

While I am comfortable with my current allocation, tax-exempt bond funds would be a good move. I do intend to transfer stock funds first and bond funds last.

======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

DLC, if that's the case, there's an argument for taking distributions early irrespective of whether the market dips. Generally speaking, markets go up over time. Even if there isn't a dip in the beginning of the year, your 12/31 value (on average) is going to be higher than your

1/1 value. So you might take early distributions in all years, to shift a bit of your gains into the taxable account.

Given that you'll essentially be moving money from one pocket to another, it seems the principal focus of your RMD planning will be tax planning, to the extent that's possible. Your RMDs will be $60k+ so there may be other effects...eg Social Security taxed, perhaps losing some state & federal tax benefits associated with lower AGIs. There may not be much you can do about that, these being RMDs. But you may be able to do other things to reduce ordinary income. Shift from taxable interest to tax-exempt, even for money-market checking. Try to realize up to $3,000 in capital losses each year, to offset ordinary income. These little things could add up -- though of course, weigh them against simply paying the tax (tax-exempt funds might yield less even factoring in taxes).

And there may be one way to directly lower your RMD, by giving all or part of it to charity -- if that special provision is extended past this year. There's a bill to do that floating around and that's one to keep an eye on if you do any charitable giving.

-Tad

I am certainly considering funding our charitable gifts from IRA's, if possible.

Thanks all, for your comments. Much to think about.

DLC