IRS warns of 50% penalty for failing to make retirement withdrawals

[John Ranalletta]

Likely, most here have an FA who keeps track of this, but if not, time's a wastin'...
 

As those taxpayers retire or plan for retirement, the Internal Revenue Service is reminding them about required mandatory withdrawals from retirement accounts. Failure to withdraw funds or not taking the minimum required amount could result in a 50% excise tax on the amount distributed, according to the IRS.

[BamaJohn]

I'm just glad we're not getting all the government we're paying for......(sorry, the Devil made me say that!)

[Joe Frickin' Friday]

On 12/13/2022 at 7:33 AM, John Ranalletta said:

Likely, most here have an FA who keeps track of this, but if not, time's a wastin'...
 

As those taxpayers retire or plan for retirement, the Internal Revenue Service is reminding them about required mandatory withdrawals from retirement accounts. Failure to withdraw funds or not taking the minimum required amount could result in a 50% excise tax on the amount distributed, according to the IRS.

 

William Sharpe said that retirement spend-down is the "nastiest" financial problem.  From what I've read, he was focusing on the uncertainties of lifespan and economic conditions and how to best manage one's investments so that they're certain to outlast you.  But from where I'm sitting, holy crap, there's so much more.  I have one health insurance plan and one paycheck right now, but after I retire, it will get much more complicated: all the Medicare parts (plus supplemental), a pension, SS, withdrawals from ordinary investments, withdrawals from tax-deferred investments, RMDs, and so on.  That's a lot to keep track of, all while your brain slowly slips out from under you.  

 

One article I read recently said that waiting until the end of the year to take your RMDs is not a good idea - because your heirs (or your executor) are required to withdraw any RMD that you don't during the year of your death, and if they aren't able to take that RMD before the end of the year, then they get hit with that 50% penalty.  

 

[John Ranalletta]

55 minutes ago, Joe Frickin' Friday said:

 

William Sharpe said that retirement spend-down is the "nastiest" financial problem.  From what I've, read, he was focusing on the uncertainties of lifespan and economic conditions and how to best manage one's investments so that they're certain to outlast you.  But from where I'm sitting, holy crap, there's so much more.  I have one health insurance plan and one paycheck right now, but after I retire, it will get much more complicated: all the Medicare parts (plus supplemental), a pension, SS, withdrawals from ordinary investments, withdrawals from tax-deferred investments, RMDs, and so on.  That's a lot to keep track of, all while your brain slowly slips out from under you.  

 

One article I read recently said that waiting until the end of the year to take your RMDs is not a good idea - because your heirs (or your executor) are required to withdraw any RMD that you don't during the year of your death, and if they aren't able to take that RMD before the end of the year, then they get hit with that 50% penalty.  

 

 

Tthe elephant in the room for seniors is assisted living, memory care, nursing home care, etc.  I want to remember your dad may have been in assisted care.  A relatively nice facility in Indy is $8k/month.  Acturarily, the average nursing/assisted living resident lives 2.5 yrs; so, 30 x $8k = $240k reserve per person MINIMUM is required.  Long term care policies are problematic at best.  Some insurors went tits up and/or the premiums are astronomical.  Medicaid's an option if a concrete block cell with a window, meager furnishings & care are acceptable.  My sister's been in memory care since early '19 and physically, she might last another 2-3 years.

 

Aside from having a big enough cash hoard, the secret is to budget and live within the budget.   

 

Early on, I found MaxiFi.  The video lays it out.  After the users input required data (savings, investments, real estate, SS, etc., Maxifi projects minimum outlay and discretionary spending out to age 100 (very conservative as most of us will reach room temp in our 80's or early 90's.)  User can select risk levels, COL and rates of return or accept the defaults which change with the economy.  It is much more useful than the "% of success" BS in financial advisor software because it has more real data.

 

In Maxifi, I can "reserve" a portion of our spendable assets for assisted care based on the above costs.  That reserve (stock, bonds, cash, etc) earns returns but the program doesn't include it in funds available for spending.  It has a level of granularity that would impress even you, Mitch.  YMMV

 

 

 

 

 

 

 

[Joe Frickin' Friday]

On 12/13/2022 at 2:03 PM, John Ranalletta said:

Tthe elephant in the room for seniors is assisted living, memory care, nursing home care, etc.  I want to remember your dad may have been in assisted care.  A relatively nice facility in Indy is $8k/month.  Acturarily, the average nursing/assisted living resident lives 2.5 yrs; so, 30 x $8k = $240k reserve per person MINIMUM is required. 

 

My mom was in assisted living for a year before she died, so she beat the average. 

 

OTOH, my dad was in AL for five years.  The cost depends on the level of assistance you need; in his case, I seem to recall it was about $7K per month (and for that price, the quality of care left a lot to be desired).  After breaking his hip (one year ago tomorrow), his final four months were spent in a skilled nursing facility that cost about $15,000 a month.  This is another one of those crazy uncertainties of one's twilight years: some of us will drop dead at home without ever having needed expensive care, while some others might live for decades in an assisted-living facility.  It's nearly impossible to plan for something like this, except by making sure you keep a very large reserve.  

 

Thanks for the Maxifi info,  I may sign up to see how it compares with my homework.  I've made a bunch of long-term financial spreadsheets over the years, and they've gotten more and more complex, most recently getting to the point where I can project how much to take out of tax-deferred accounts before RMDs are required so that the size of the RMDs doesn't result in a higher marginal tax rate.  Still plenty of uncertainty there between inflation, asset growth, tax policy, and other stuff.  My gut feeling is that the error bars on the projections get pretty large when you're trying to look more than ten years out.  

[John Ranalletta]

Having thought about Maxifi over night, I'm not sure if it would have as much value for younger (not retired or nearing retirement) because a younger person's future income stream(s) might be more uncertain.

[Patallaire]

RMD'S need to be taken out, while the statement  is true, it can be executed in a number of ways.  You can make a Like for Like transfer from the IRA to an individual account, not actually sell the positions in a down market and just pay the taxes due on the RMD amount, as an example, if you own a S&P 500 index in your qualified account,{IRA} you can then transfer it, like for like into the same fund in a non-qualified account, pay the tax, hold the positions.   You can also take the RMD, pay the  taxes and immediately re-invest the proceeds into an investment of choice or debt reduction.  You can also have it put on automatic's distributions, this prevents a miss. Re-investment choices can vary from tax deferred, tax free to taxable.  It can be done monthly, quarterly or annually. So there are choices and none of them involve spending it when you take it, unless you need it for income.

The estimate on Medical expenses in retirement is between $275,000 to $350,000 over retirement, that includes LTC. Now that number is out there, the fact is that it is generally realized in pieces, so it is handled from cash-flow, not as one lump sum. Long Term Care policies are a blessing, I have quite a few clients who are on claim and elated that they have them.  The premium is not the problem, the problem is the problem. Probability of needing it exceeds 55%, probability of a house fire, 1 in 12,000.  When you compare the premium paid to benefits potentially received there is not much discussion. The cost of a facility in WNY is $14,000 per month or$168.000 per year, the equivalent of buying a new High end car every year for cash,  or in some areas a new home every year for cash or a new Sub-Zero refrigerator for cash every month. . Medicare does not cover this expense for its entirety.{Max 100 days dance through hoops}  Even if you paid the premium for 20 years {Assume $5,000} before you used the contract, it is unlikely that 1 year in a facility would even come close to the total premiums paid. It's like home owners, how many times have you ever had a fire, but you are covered in case. Buying any insurance is like buying a parachute or toilet tissue, when you know that you absolutely need it, it is too late to go get it.

Transferring assets has a 5 year look back rule attached to it.  

The new studies on distributions from all accounts not counting Social Security or pensions plans is 3.8 % a safe number is 3.2%, this is a number that estimates living to age 95, in the event you know better, write the date of your death down and your planner can plan your spending to the penny. Don't miss, cat food is not cheap!    This means with a $1,000,000 portfolio you can withdraw $32,000 to $38,000 and adjust for inflation. This number replaces the 4% Rule. There are exceptions but it is a solid benchmark to use in doing pre-retirement estimates. There are ways to work around that through different investment choices and when you trigger your Social Security. The distribution side of my practice is more complicated but my specialty, , the variables in peoples lives are complex compounded by the uncertainty of markets, inflation, government, world events, health, longevity, legacy wants, debt, spending discipline, etc. 

Plan ahead, it wasn't raining when Noah began to build the Ark! 

 

[randy]

Pat can confirm this, but I believe congress passed a change and it will be phased in, but the RDM age will be 75 over the next 10 years.  So if you are 65 today most likely you will not have a RDM until age 75.

so that is awesome

 

also consider these options

if you give to a charitable organization, you can contribute directly from you RDM accounts to the charitable organization.  It counts towards your RDM but does not count as INCOME.  so, say you give 12k a year to a charitable organization and your RDM is 50k you can send 12k directly and take 38K yourself and only 38k counts as income, but you get the whole 50K to support your RDM requirement.

 

Also consider if on a joint tax return and one individual is substantially younger and the older partner has an IRA account, as the older person takes out their RDM they can then INVEST in an IRA for the younger person.  So, say the older person has a 50K RDM requirement, and they take out 38k, give aa direct contribution of 12K to a charitable organization and then they contribute 7k to the younger person's IRA now they only have a net 31K going to income for that year.

also, assuming you do not need all the RDM to live on, (it is not a tax advantage), but I believe (currently) you can continue to contribute to a ROTH past age 75.  So, if your finances allow, take your RDM and at the least keep contributing 7k to the ROTH accounts.

Just a couple options if it fits your life choices



 

[Joe Frickin' Friday]

10 minutes ago, randy said:

Pat can confirm this, but I believe congress passed a change and it will be phased in, but the RDM age will be 75 over the next 10 years.  So if you are 65 today most likely you will not have a RDM until age 75.

 

It sounds like there are two bills slowing grinding through Congress, the Secure 2.0 Act and the EARN act:

 

https://www.kiplinger.com/retirement/retirement-plans/required-minimum-distributions-rmds/605212/rmd-changes-possible-this-year

 

Either would change the age at which RMDs begin to 75, but one would make the change more gradually.  From what I can tell, neither bill has yet passed both houses and been signed into law yet.

[randy]

if not passed I believe it will.  I do assume it will be the phased in that gets passed.  Again my wife is 64 so I am hoping it does change to 75, that gives us 11 years before she has any RDM.  that is a lot of compound growth.

[Rinkydink]

Didn’t they raise the RMD from 70 1/2 to 72 1/2 a year or two ago?

[Patallaire]

4 hours ago, Rinkydink said:

Didn’t they raise the RMD from 70 1/2 to 72 1/2 a year or two ago?

Not exactly, they took it from 70!/2 to 72. 

 

7 hours ago, randy said:

and they take out 38k, give aa direct contribution of 12K to a charitable organization and then they contribute 7k to the younger person's IRA now they only have a net 31K going to income for that year.

The charitable part works, the spouse would pay taxes again on the withdrawal when she makes it, ergo, the same dollars are taxed twice. What direction do you think tax rates are going after the 2017 tax cuts expire? 

 

7 hours ago, randy said:

if not passed I believe it will.

LOve the optimism but current law is age 72. So we plan accordingly.  What happens when they change teh age, they use the mortality tables at that time, so the distributions of the RMD tend to be higher , as life expectancy is shorter. 

 

7 hours ago, randy said:

you can continue to contribute to a ROTH past age 75

If you are not working you can not contribute to a Roth IRA, your spouse can contribute to your Roth IRA if they are within the parameters of the earned income guidelines and max contribution guidelines, and are working. The only advantage of  that strategy would be for her to be putting money away for her legacy to withdraw tax free, under current law. She would have had to earn it, pay income tax and FICA on it so the rate of return would need to offset that expense.   The compounding effects would be de-minimus as time would not be the ally it would be at age 40.  Any inheritance after her would need to be withdrawn within 10 years by teh non-spouse inheritor. The earned income is traditionally from work performed, and it may include wages, salaries, bonuses, commissions earned, tips, and self-employment income. Other incomes that may qualify as earned income include taxable alimony, stipend payments, and disability benefits.

[lawnchairboy]

thanks Pat, great info.

[Joe Frickin' Friday]

On 12/14/2022 at 11:52 AM, Joe Frickin' Friday said:

 

It sounds like there are two bills slowing grinding through Congress, the Secure 2.0 Act and the EARN act:

 

https://www.kiplinger.com/retirement/retirement-plans/required-minimum-distributions-rmds/605212/rmd-changes-possible-this-year

 

Either would change the age at which RMDs begin to 75, but one would make the change more gradually.  From what I can tell, neither bill has yet passed both houses and been signed into law yet.

 

Secure 2.0 Act is up for a vote in congress this week:

 

https://www.cnn.com/2022/12/20/success/retirement-savings-secure-2-0-omnibus/index.html

 

 

[Sonor]

Q about RMDs - My wife enherited her fathers and has the "burden" of RMD. While we don't use it currently, we have to take something. But with the market as low as it is and expected to go lower next year, would you take more out now while taxes are low and reinvest? Or would you take little in the hopes it will go back up in a couple of years?

[Joe Frickin' Friday]

1 hour ago, Sonor said:

Q about RMDs - My wife enherited her fathers and has the "burden" of RMD. While we don't use it currently, we have to take something. But with the market as low as it is and expected to go lower next year, would you take more out now while taxes are low and reinvest? Or would you take little in the hopes it will go back up in a couple of years?

 

I'm not an accountant, but like your wife, I inherited some tax-deferred accounts because my dad died earlier this year.  So I'll tell you what I've learned.

 

First, let's make sure we're talking about the same thing.  If your wife inherited a tax-deferred account  because her father died in 2022, she may or may not have to take an RMD this year.  If her father didn't take his full RMD for 2022 before he died, then she will need to complete it.  And if she does need to do so, she'll want to make it happen before December 31, or she'll forfeit half of whatever portion of the RMD didn't get withdrawn in time.   If she's not sure, she should contact whomever  the investment is with (Fidelity, Vanguard, etc.) today and ask if there's still an RMD due for 2022.

 

For an inherited tax-deferred account, once the RMD for the year of death is completed, there's no RMD requirement in future years.  However, the other issue for inherited tax-deferred accounts is the ten-year drawdown requirement.  An inherited tax-deferred account has to be completely emptied out by December 31 of the year ten years after the decedent's death.  So if her father died sometime in 2022, then she's got until 12/31/32 to empty the account.  She could take it all out now, or 9.9 years from now, or take a small withdrawal each year between now and then.  So maybe that's the question you're asking: what's the best strategy for emptying the account over the coming decade?  

 

If the share price is down now, it may be a good time to withdraw, pay income tax on it, and the deposit the rest in an ordinary investment (stock/bond/mutual fund, etc.).  But there are two other factors to consider:

• If you and your wife are currently employed such that you've already got substantial taxable income, your marginal tax rate may be high (or you may be close to the next bracket), and whatever you withdraw from the account will be taxed at that high marginal tax rate.  Check out this year's tax brackets:  If for example you're married-filing-jointly and your taxable income for 2022 (without any IRA withdrawal) is $83,550, any amount you withdraw from the IRA will be taxed at 22%.  If you both plan to stop working sometime in the next ten years, your taxable income will drop, and so will your marginal tax rate - and after that, you'll be able to withdraw a larger sum from that account and have it be taxed at a lower rate.
• If the account balance is large, and you make a large/total withdrawal in one year, some of it may end up bumping up into those high marginal tax rates, even if your non-IRA taxable income was low in the first place.

It's a maddening puzzle because over the next ten years your work plans and income may change, tax rates may (probably will) change, inflation rates may change, and the inherited IRA may grow/shrink unpredictably.  Example, if you end up working longer than you expect (or the account grows faster than you expect), then in the final few years you may end up taking larger withdrawals than planned, resulting in a large tax bill.  The best you can reasonably do is lay out a  coarse withdrawal plan for the next ten years based on what you currently know about your work plans, tax brackets, and account growth expectations, and be prepared to adjust your plan from year to year as conditions change.

 

[mickeym3]

The new spend(thrift) bill changes a few items, including RMD’s and penalties so it’s suggested you investigate since some of it goes into effect immediately according to my Wall Street news feed. 

[Sonor]

Thanks for the info - Yes it is an inherited (enherited as stated previously - sorry for the typo) and we are working on a ten year draw down as it was 2020 when her father passed from Covid.  And you are %100 correct it is maddening. I am retired, my wife was going to until the market did its adjustment (dropped). She is now planning on another couple of years or work. As I am also on Medicare due to age, I have found it is better for us to file separately which means the RMD would be on her. So we are investigating all possibilities of distribution and guessing at the tax rates vs. the investiment growth for the next few years.

[Joe Frickin' Friday]

On 12/23/2022 at 12:07 PM, Joe Frickin' Friday said:

First, let's make sure we're talking about the same thing.  If your wife inherited a tax-deferred account  because her father died in 2022, she may or may not have to take an RMD this year.  If her father didn't take his full RMD for 2022 before he died, then she will need to complete it.  And if she does need to do so, she'll want to make it happen before December 31, or she'll forfeit half of whatever portion of the RMD didn't get withdrawn in time.   If she's not sure, she should contact whomever  the investment is with (Fidelity, Vanguard, etc.) today and ask if there's still an RMD due for 2022.

 

For an inherited tax-deferred account, once the RMD for the year of death is completed, there's no RMD requirement in future years.  However, the other issue for inherited tax-deferred accounts is the ten-year drawdown requirement.  An inherited tax-deferred account has to be completely emptied out by December 31 of the year ten years after the decedent's death.  So if her father died sometime in 2022, then she's got until 12/31/32 to empty the account.  She could take it all out now, or 9.9 years from now, or take a small withdrawal each year between now and then. 

 

One more clarification for anyone reading this in the future:

 

The US federal government doesn't offer 401/403/457 accounts for federal employees.  Instead, we get the Thrift Savings Plan, which has slightly different inheritance rules.  The RMD for the year of death must be completed as described above, but the ten-year drawdown rule comes with a twist: once the decedent's TSP account is transferred to the heir's temporary TSP holding account, the heir has 90 days to rollover the funds to a death-benefit IRA account at some other institution (Fidelity, Vanguard, TIAA-CREF, etc.).  That DB-IRA is then subject to the aforementioned ten-year drawdown requirement.  If the heir doesn't empty out the  temporary TSP account within 90 days, then a check for the entire balance will be withdrawn and sent to the heir, and the heir will be responsible for paying income tax on that amount.   When the heir logs into that temp TSP holding account, they can enter institution/account info for the DB-IRA and also for their bank account (if they want to make a direct, taxable withdrawal, e.g. for the death-year RMD).  There's a 7-day waiting period after entering the account info before the funds can be transferred, so don't wait until the last minute to deal with all of this.  

[randy]

as noted in an earlier message, Tax rates are only going up.  and of course you have to decide that on your own

As Mitch noted, marginal tax rate today might be 34% for you, but in 10 years the marginal tax rate might still be 34% for you (even with lower income) as tax rates (in my opinion) will go up substantially.  At some point an administration is going to be forced to significantly increase the tax rates to pay the interest we owe every month (note I did not say pay down the national debt).  to me this is inevitable.  But as Mitch and Pat noted you have to make your own decisions about what the future holds.

As Pat noted, my strategy of taking my RMD as required, but then putting into my (younger wife's) IRA account moves the tax bill from today too down the road but could backfire on me.  However as of now, we do not need the RDM money, and if I pass away and my wife inherits my IRA and Roth monies, with her getting my SS benefits but losing her SS benefits the expected RMD amount should only put her (in today's bracket) into the next level bracket and not into multiple higher bracket.

As everyone has noted it is very complex and I agree with Pat somewhat of a crap shoot.

[Patallaire]

Well on the good news front, it appears that they are moving the RMD age to age 75, next year{2023} it moves up to age 73 and ratchets up from there.  The bad news is that the Mortality numbers will be triggered sooner  so the % of withdrawal goes up proportionately. The 10 year withdrawal only applies to Non-Spouse inheritors. 

So when you are planning and working, ask yourself if after a certain point of putting money in a Tax Deferred account{IRA, 401-k, 403b, 457 SEP, Simple, etc.} is your account worth the extra income taxes you will pay to withdraw or the inheritor will pay when it jacks up their bracket?  Or do the calculation to determine if paying Capital Gains tax might be a stronger strategy and for the inheritor, a step up in basis with no mandatory distributive rules. 

The next question is to ask yourselves "Was your goal to work your entire life with the goal of being  in a lower tax bracket?"  Did you get up every morning, and say I can't wait to work all day so when I retire I can be in a lower tax bracket?" 

The last question is, "Did you work your entire life, scrimp, save, and make sacrifices to leave a large legacy?" When you were 35 did you wake up each morning and say to yourself, "I am doing this so my kids or whoever inherits this, will be rich."

Only you can answer those questions, and if you are young enough you might have the time to plan or re-plan.  One of teh major issues we see no in the industry, with people who have some wealth, is that they are not enjoying it as much as they could. Therefore a legacy plan is the accidental default. 

[Patallaire]

On 12/27/2022 at 2:50 PM, randy said:

my strategy of taking my RMD as required, but then putting into my (younger wife's) IRA account moves the tax bill from today too down the road but could backfire on me. 

Randy:

If you don't need the RMD and want a leveraged strategy, like buying a home and and financing it, where you control a large asset with a little money out of pocket, use the RMD to buy a Life Insurance policy.  The probability of dying is up exponentially from when you were 30.  You can either buy a 20-25-or 30 yr Term, depending on your age and health or a Index type policy to age 120. Either way, if/when you die, your wife will get a much larger multiple than your premium paid or potential ROI from investments. The benefit is income tax free and there are no distributive rules to abide by for the rest of her life or whoever inherits it afterwards.  Just work the math.  Premium x expected years paying - death benefit= ROI.  That is the leverage. It works and is one of the ones that is guaranteed by the financial strength of the insurance company and has tax advantages and no market risk.  Remember, Insurance is not religion, you can not, not believe in it.  It is a financial instrument designed with a purpose. View it only with that lens. If you are considering it, I would suggest you look at it long before you reach the RMD age.  Premiums go up with age and options sometimes decrease because of age and health. 

[randy]

interesting I have never had insurance (except from my employer) Always just self insured.  I guess I should look at the numbers.  Last time I checked into any type of insurance was back when Cathy and I got married in 1981 and it did not make financial sense at that time.  Like most of life, I am sure things have changed.

[Patallaire]

14 minutes ago, randy said:

1981 and it did not make financial sense at that time.

Wow, yes they changed. The premium is never the problem, the problem is always the problem. Just look at the leverage and the probability of dying, which is 100%, we just don't know the day. In 1981 the mortality tables were different and the offerings were much different. Take a look at it against your goals and also look at the tax advantages. With Life Insurance, you are betting against the insurance company.  You are betting you will die, the insurance company wouldn't underwrite you if they thought that were true. Either way, die too soon or later, they pay. when you die. With Social Security you are betting you won't die, the government is betting you will die on schedule, they keep the difference.  WIth IRA's 401-ks etc. the government gave you a deduction for your contribution to the accumulations,  you took the risk, made the contribution at a lower tax bracket, in all probability, regardless of win, lose or draw, they get the taxes on withdrawal by either you or your beneficiaries on all the account balances, not just the gains.

[randy]

one comment, most of my money is in ROTH, that is the one good decision I made when I finally started investing.  I max out the ROTH every year, even when we were broke, I took a second job, or Cathy did some extra work, whatever it took to make our ROTH contribution.  

[Patallaire]

Randy that is great.  Your contribution caps were lower when you started, you had income restrictions but it appears to have all worked.  You have market risk and inflation risk to contend with and you will need to understand what your withdrawal rate will be in all markets so you don't run out of money before you run out of life. I will be unavailable for about a week, so if you want to continue this, I will respond after the 9th. 

 

Sounds like you are on the right path. 

[randy]

to be honest I did terrible.  for some reason I never could find a good money manager, and I never had an interest in it myself.  Over my work life I lost almost every penny of earned interest.  Never lost principal, but never really made any money either.  I only blame myself; I should have taken an interest in understanding the basics and not left it up to money managers.  And I realize SS will most likely go away, has to at some point, SS is basically a Ponzi scheme so it will falter.  Currently SS and pension pays my wife and I enough to comfortably live on.  I just hope we get at least 7 more years.  If so, then 7 more years of contributions and interest should see us comfortably for as long as we live.

[Patallaire]

On 1/3/2023 at 9:31 AM, randy said:

And I realize SS will most likely go away, has to at some point, SS is basically a Ponzi scheme so it will falter.

I doubt it will go away, it may change over our lifetime, but it will not go away.  It's not what you earn that makes a difference, its what you keep that has the greatest impact.  So, if you know you have a 7 year working time horizon start reducing expenditures now and dramatically increase savings now.  The sacrifice will pay multiples when that is all you have to live on forever. 

[randy]

Pat you are far more optimistic than I am.  It does not matter what political spectrum we fall on; our Congress is out of control.  Every year we spend more than we bring in, and every year we sell debt.  Maybe I do not understand how world financing works, but to me that is just not sustainable.  and when it come time to pay the piper I think Social Services will be first to go.  but hey maybe we will just down our military and that will cover our shortfall.  If I understand our goverment spending the Military is about 1/2 and combine Social Services is about 1/2.

anyway way off topic, my biggest hope is they do move the RMD to age 75.  And that my wife and I stay reasonably healthy.  Assuming normal medical costs, we are good to go just on SS, Pension and savings, never needing to touch our investments.  Plus I like what I do, and so long as I am mentally healthy I can work as long as I like.  Loundes is my hero, he is like 73 and still works at something he enjoys.

[Patallaire]

21 hours ago, randy said:

my biggest hope is they do move the RMD to age 75

 

21 hours ago, randy said:

Loundes is my hero, he is like 73 and still works at something he enjoys.

Randy:

 

They did move it up to age 73 this year and 75 by 2033.  Don't cheer that too much, by that time they will have raised the RMD requirements to align with mortality numbers so you will need to withdraw more than you would have to currently and they will have changed the tax code to be higher than today and the Medicare expense, which will rise as your income pushes up. 

By the way, I just turned 75, still own my business and help new clients as well as my existing clients to achieve their goals, every day,  and love what I do! 

[randy]

I had been busy and missed that.  I really thought it would be 2030, oh well

[SteveHebert]

This thread is excellent.  Thanks for all the information guys.  I am approaching 57 so we have a few years yet to worry but we have begun consolidating all of our investment accounts with one institution and have an excellent management team to help us.  I am also in the process of starting my own business and learning (a very steep curve at this age) all about the tax drama that goes with it.

 

I didn’t realize that about TSP Mitch and very much appreciate the info!

 

isn’t it sad that we work our entire lives to be financially independent and successful, and not a burden to our heirs-only to be out maneuvered by the government yet again?

[Patallaire]

1 hour ago, SteveHebert said:

isn’t it sad that we work our entire lives to be financially independent and successful, and not a burden to our heirs-only to be out maneuvered by the government yet again?

Knowing the rules and how the game is played gives you the advantage through planning.  Sometimes Qualified plans are not the right solution. Since you are starting your own business you will be responsible for both sides of the Social Security contribution and Medicare. Assume 15.2% of gross.  Oftentimes, accountants might suggest that you keep your income low so you don't make much of a contribution, albeit the same percentage, but of a smaller income number.  That works if you are saving the 20% of gross that at your age you should be saving and the 15.2% of gross that you would have paid into SS.  Hardly anyone does that, so just be aware of that. 

[SteveHebert]

Thanks for the info.  I am the only employee and it is an S Corp.  As far as the savings part goes, we  have  been fortunate enough to save over 50% of our gross the past several years and have no debt.  This new business allows me to work as an independent contractor directly for the company I will support and we will be saving the majority of that income as well.

[Patallaire]

3 hours ago, SteveHebert said:

we  have  even fortunate enough to save over 50% of our gross the past several years and have no debt.

That is fantastic.  Keep up the great work. 

[Joe Frickin' Friday]

On 12/23/2022 at 12:07 PM, Joe Frickin' Friday said:

For an inherited tax-deferred account, once the RMD for the year of death is completed, there's no RMD requirement in future years.  However, the other issue for inherited tax-deferred accounts is the ten-year drawdown requirement. 

 

Earlier this week, I came across this article:

https://smartasset.com/taxes/irs-inherited-ira-10-year-rule

 

and discovered that for some folks, an inherited IRA very likely will require annual RMDs in years 1-9 (and must be completely emptied by the end of year 10):

 

Quote

The Account Holder Dies on or After Their RBD

 

In these circumstances, a designated beneficiary must take annual RMDs based on their own life expectancy. They have 10 years to empty the IRA, starting on December 31 of the year after the participant dies. In addition, if the original account holder didn’t take their first RMD, the beneficiary must receive it immediately. As with the first rule, eligible beneficiaries have exceptions.

 

That came as a shock to me, since it was contrary to what I had learned in 2022, when I inherited a few IRA accounts.  It also triggered alarm bells, because I hadn't made any withdrawal from my inherited IRAs in 2023, so I was suddenly worried that the IRS might nail me with a fat penalty.  Then later in the article, I read this:

 

Quote

Because Secure 1.0 creates a thicket of rules and classifications to wade through, the IRS decided to waive missed RMD penalties for inherited IRAs from 2020 through 2024. However, industry experts expect that the federal government will provide definitive regulation in 2024 to clarify Secure 1.0. The waived penalties are a temporary measure to give beneficiaries time to prepare for the RMD rules that Secure 1.0 introduced.

 

Because the IRS has delayed enforcing RMD penalties for the last four years, 2024 may introduce new financial consequences for inherited IRA beneficiaries. As a result, consulting with tax professionals to navigate potential tax bills associated with RMDs in the coming years is recommended. Staying informed about legislative changes will help you make effective financial planning decisions.

 

I brought this up with my siblings.  One agreed that it looked like we needed to take RMDs, another insisted we don't.  But Vanguard's website has a calculator just for calculating RMDs on inherited IRA accounts - and it said that yes, I needed to take an RMD this year.  it even included the following text, suggesting that it really is up to date with the latest info:

 

Quote

This calculator follows the IRS SECURE Act of 2019 Required Minimum Distribution (RMD) rules and IRS Notice 2023-54.
 

How could your estimate and possible actions be impacted by these regulations?

• Effective 2024, you must take RMDs each year and deplete the inherited account by the 10th year after the decedent's date of death.

 

After a fair bit of discussion, I made three phone calls to places where I had inherited IRAs:

 

• The guy I talked to at Vanguard said the RMD amount was based on the account balance at the time of my dad's death, and his life expectancy.  But that didn't make sense, because Vanguard's calculator asks for the account balance as of 12/31 the year before (so for today, that'd be 12/31/2023), and also it asks for my birth date along with my dad's.  The RMD it spits out for this year is about 1/32 of the balance, which makes sense for me: looking at the IRS life expectancy table in Appendix B way down here, the IRS thinks I'm good for another 32.5 years.

• So then I called Neuberger-Berman.  The lady I talked to there said that the SECURE Act gives us 10 years to deplete inherited IRAs, and that at this time there is no guidance from the IRS regarding RMDs.  The IRS has apparently said they are going to issue guidance, but nobody knows when.  They have been waiving RMD requirements on inherited IRAs on a year-by-year basis for 2021, '22, and '23.  So at some point this year, they'll either issue a formal RMD requirement, or waive the requirement for 2024 so they can have more time to think about it. 

• Just for good measure, I also called Victory Capital.  The lady I talked to there said  the SECURE Act 2.0 changed RMD requirements in 2020 (she must have meant SECURE Act 1.0, which passed in 2019; SECURE ACT 2.0 didn't come out until 2022).  She said that for anyone who died after 2020, the IRS eliminated the RMD method except for spouses or minor children.  Bottom line according to Victory Capital, the only requirement for us is to draw down the account completely by the end of 2032.  

So...three different sources, three different answers.  

 

Looking at IIRS Notice 2023-54, the exact relevant text is this:

 

==============================================

III. APPLICABILITY DATE OF FINAL REGULATIONS 

            Final regulations regarding RMDs under § 401(a)(9) and related provisions will apply for calendar years beginning no earlier than 2024. 

==============================================

 

So I think Vanguard's calculator declaring that RMDs definitely are required for 2024 and beyond is a bit premature.  The IRS has waived RMD requirements for '21, '22, and '23, but so far it looks to me like they haven't said anything definitive about 2024.  IRS Notice 2023-54 says "no earlier than 2024," but it doesn't say "starting in 2024."  This is consistent with what the lady at Neuberger-Berman said.  It's also consistent with what I read in the article that started my digging into all of this.

 

So...when it comes to inherited IRAs, there's no RMD requirement for now, but probably soon. If you have an inherited IRA, you'll probably get a notice from whomever is hosting your account.  But if you don't hear anything by late in the year, you may want to look into it.

 

 

 

[JCtx]

I need to get educated on all of that crap, but I keep things very simple. We both have about $115K each on IRAs (putting the max every year), no stocks of any kind, and all of my investments (in notes) are with one escrow company. And substantial cash reserves. If I hit the sack suddenly, my wife would only have to probate the investments. But I need to make a will, since I have enough that I want to leave my daughters my half, then my wife could do whatever she wants with hers (pus she'd get the house). My daughters should get more from her when she passes... unless she squanders it with a stupid guy (or gets scammed). Ha ha. But what I'm NOT looking forward to is the Medicare nightmare when I turn 65, which I REALLY need, since I'm paying to the wazoo for the 'experimental' cancer medication I need for life. I also need to call SS, and decide what is best to do about retirement benefits. I'm most likely not going to get to an old age, since the tons of chemos I've had will probably rear their ugly head sooner than that. But if I do, once I stop enjoying life due to mobility issues, side effects, pain, dementia, or anything else, I'd just stop taking my medication, and I'd be gone in a few months. MUCH rather leave my daughters more money, than throw it away in assisted living, and be miserable for the rest of my days. That's not for me. But yes, it's important to plan for all of that crap, especially for those of us who NEVER want to be a financial drag to our kids. The mental and psychological one is enough. Many of my generation believe our kids are supposed to take care of us, but that's absolute crap. I'd NEVER do that, even if they offered. I know I won't be a drag, but hope my wife is not either. Not fun getting old, but I try to keep in shape to be able to do what I like (mostly riding fast -ha ha-, hiking, and traveling) as long as possible.

[Rougarou]

I'm fortunate to have Uncle Sam's Gunny retired pay for life.  My Uncle also says I'm 70% broken, so he gives me a chunk of change for that too.

 

That being said, I retired from the Misguided Children's organization in 2009.  This company I joined after that retirement pays well for the area I live.  Since 2009, I started the 401k with the equal match of the company.  Every raise since 2009 has gone to the 401k to the point, I can't put anymore into it annually (and catch up fund) and have thrown some dollars at a couple of high interest savings accounts (5%), letting those ride.  My take home pay has only changed about +$200 a paycheck since 2009, .......yes, I'm living on 2009 take home pay in 2024 and doing just fine (retired pay raise is nominal).  My wife is a teecher, so, it's not like she's getting big funds either.  She is also giving it a break and not going back next year so that's gonna be a dent in our income, but a planned dent.

 

The other day, for S&Gs, I pulled up the social security calculator to give me the estimate at 65 and 67(not that I'ma work til then, but let's just take a look).   With USMC retirement, disability, 401k payments, stuff in the savings accounts and social security,.....we'll be just fine.

 

Now, to caveat that, I don't manage the money that makes it to our Navy Federal account (my paychecks, retirement and disability), my wife does, I actually have no idea how much in total we have in our accounts(she has a different bank that would spread her teacher pay equally across 12 months) and don't want to know.  If I managed my money, I'd have more bikes and tractors, and be broke.  The only part of my money I actually manage is to keep my paychecks on a steady line while putting anything beyond what I made in 2009 towards some savings/retirement.  One could argue that I need to look at other IRAs, but I like having those high interest savings accounts as a big cushion that I'll likely never need to pull from emergency wise.

[Skywagon]

Roug… you are doing the right thing. After I got out of school I had amounted school and living debt that was hard. I got married 3 years later. We used my wife’s salary to accelerate getting debt free… 2 years. From that point on we banked all her salary for 24 years until she retired. I started taking deferred income and invested in the market. I also put money in savings, IRA’s, etc. 

 

Fast forward to my retirement 5 years ago. We have nice pensions, SSI, and about 95% of our working income. I’ll soon be facing forced withdrawals which we don’t need. I guess that is a good problem to have. 
 

Unlike Mitch… my inheritance from my family was the expense to bury them… parents and siblings. Any funds or assets they had was willed to my sister at my insistence. 
 

Find a good CPA who can explain tax and RMD’s. I wouldn’t trust any fund manager to be intimate with tax law. I have stock/deferrals with 4 different brokerage firms and their advice is mixed and often wrong. They have personal interest and how they can benefit in your funds and a CPA does not. 

[MikeB60]

@Rougarou my situation is very similar. Raising 3 kids on NCO pay we basically lived pay check to pay check with the understanding that we had a decent pension for the future. Uncle Sam also acknowledged that I am broke and i am at 80%. I also get a pension from my 20 years of civil service upon retirement as does my Frau. 

@Skywagon Thanks for the advice regarding getting with a CPA! We both have traditional 401ks and i need to get some sound advice on RMD and possibly converting to Roths.

[Rougarou]

Many folks that I tell that I "haven't had a raise since 2009", don't get it.   Active duty, I always had " just enough", two girls and putting the wife through school on just my income.  There were times we couldn't afford Kool-aid and had to by Wyler's, but we had what we needed and we never requested any types of assistance.

 

A Master Guns that I knew, had been living on Cpl pay with two kids all the way through retirement.  He prepared himself financially to do that.  When we moved from Okinawa to NC (knew NC would be my last duty station), when prepped the finances to be so that if the world ended, my retired pay would cover the household expenses,....did not anticipate disability pay at all in that.  We planned for me not finding a job and her not finding a job.  She did get hired as a teecher and I got a good gig with a defense contractor,......so, I made the call to maintain the 2009 pay schedule.  

 

'tis all about living within the means that you have and planning for the times you don't have that coming in.

[Joe Frickin' Friday]

2 hours ago, Skywagon said:

I’ll soon be facing forced withdrawals which we don’t need.

 

As long as the RMDS aren't so large that they push up into a higher tax bracket, then taking RMDs that exceed your living expenses isn't really a problem (you can just put the surplus in your bank account or in an ordinary investment).  But if it looks like outsized RMDs could be a tax problem, you might be better off (tax-wise) taking some voluntary distributions as soon as you're able so that the account balance is lower when the RMDs have to start (which results in smaller RMDs that hopefully don't punch up into a higher tax bracket).  

[John Ranalletta]

We make all of our material contributions to charitable organizations directly from our IRAs but not exceeding the minimum MRD.  
 

“Money from an individual retirement account (IRA) can be donated to charity. What’s more, if you've reached the age where you need to take required minimum distributions (RMDs) from your traditional IRAs, you can avoid paying taxes on the money by donating it to charity.”

 

[Joe Frickin' Friday]

Talk about perfect timing, the IRS just announced today that they are waiving the 2024 RMD requirement for inherited IRAs:

 

https://www.planadviser.com/irs-extends-relief-inherited-ira-10-year-rule-enforcement/

 

They also said this year will likely be the last year for this sort of relief.

[randy]

I was just reading that IRS ruling today at lunch.  small world.  but as noted by our very astute board person Pat Allaire there are options.  IF this is important to you and IF you want to still work, you can basically take your mandatory RDM and then just fund your Roth and IRA again.  reducing your tax burden, not eliminating it, but as Pat noted it can be a substantial reduction.  In addition, if you give to charities, church, cancer, local boys N girls club etc. any legitimate charity, you can transfer from your RMD account directly to the charity and the amount transferred is counted towards your RMD withdraw requirement but does not go as income.  

As Pat noted it takes work, but you can lessen the Tax bite quite a lot with good planning.  

[realshelby]

22 hours ago, Rougarou said:

 

'tis all about living within the means that you have and planning for the times you don't have that coming in.

The older I get the more important this statement is. Should be read in at all commencement ceremonies!

I am shutting down my business end of the month. Filed for SS starting June of this year. Wife filed for SS and just got her first "check". During all this process I have talked with friends about retiring and shutting down the business ( that started because I cannot run it and draw SS, now I don't care....). I am astounded at how many people don't have enough money saved to cover shit! Admitting stuff like that to me....and yet they have no plan to change. Yes, these were in many cases folks that bought new cars every year or two, latest cell phone, fanciest of homes....you get the idea. 

I started married life living in a trailer. Some would call it a mobile home, but I know my place in life. Trailer. I had already started Life Insurance policies. Had a savings account at the bank. Both me and my wife planned to retire from our 20's. Now we can. I hear stories about some claiming retirement should not start till 75 as that is the way SS should work. That is mostly from pencil pushers. Work in mining, construction and any job requiring physical exertion and maybe you would think differently as 60 comes around and 65 is nearer. You have things that hurt! Plan to retire sooner than later!