My spouse had December 70th birthday so she began her required Minimum distribution (applies to Roll-over traditional IRA, not to her Roth) not quite one year ago, based on her 2013 December 31 balance. I had my August 70th birthday in 2014 so I am taking a look ahead to take my first RMD at the same time spouse is taking second RMD. The reason is to avoid taking TWO required minimum distribution pay outs in the same tax year (as advised by our CPA who has prepared our federal joint income tax return each year beginning thirty years ago). As I did about one year ago, I used an on-line RMD calculator. The balances are not identical (spouse has a bit more than my roll-over - but both are substantial). When I compare the calculated amount against the "what-if" balance (based on yesterday's market close) hers and mine are 3.84% (her second year) and 3.85% (my first year RMD). I suspect that is because statistically she (female) is supposed to outlive me, so I have to take a gnat's eyelash more. The other part of the equation is to make sure I do come up with enough tax withholding in the year 2015 as a consequence.
In my (spreadsheet) workbook I also took a peek at what beneficial effect these two will make on our monthly income in 2015 (by adding the two, then dividing by twelve). It is substantial (and remarkable).
I would like to caution others that I used some percentage to figure out what the RMD might be based on the exact value of an IRA account on December 31. The IRS says that your "Distribution Period" is exactly 27.4 years at age 70 (or 70.5). This means that the IRS will expect YOU (NOT TIAA-CREF) to withdraw 1/27.4 * that December 31 value.
I was surprised that TC came up with a different number than I did. But when I used the above approach, I got exactly what TC did. Remember that the penalty for not withdrawing enough is VERY STEEP. And even though TC is so helpful with this, you may be directly responsible to the IRS for any mistakes.
Here is the 2013 IRS table that I believe is in effect although it may change so keep looking it up in the IRS publication:
Thank you. Yes, requiring an exact figure does make me a bit uneasy. There are "high occupancy toll" lanes (new) in the D.C. area where collection is done via "Flex" EZ-pass (not your standard Pass) and there are news stories of $27,000 in fines for people where technological glitch resulted in loss of a toll of under four dollars. This kind of thing is unconscionable, especially for aging people. (My sister almost six years younger than I already has severe Alzheimer's symptoms and behavior).
I'm getting confused. Are RMDs from traditional (not Roth) IRAs counted as ordinary income for tax purposes? If so, we will probably be bumped into a higher tax bracket when we start taking our RMDs.
Is there any way to tax shelter that money either now or after we turn 701/2? I guess I'm thinking that it might be better to start taking out a little more than we need right now and pay a little tax so as to avoid encountering a large tax liability every year after we turn 70. In that case, would we be better off rolling small amounts of our traditional IRAs into Roth IRAs every year before age 70 or would we be better off taking RMDs after age 70 and paying taxes on the distributions?
Yes, RMD's from Traditional IRA's ARE regular income just like interest, dividends, wages. Roth's do NOT have RMD's and when you do take distributions they are NEVER taxable. And, yes, Traditional RMD's will eventually push you into higher and higher tax brackets if you are so fortunate to live long enough. The IRS tables insure this. Just look at the percentage of your IRA that you have to take as you pass 85 and it gets brutal in your 90's. At least our tax bracket will be significantly higher than it is now due to the amounts being taxed.
We have been for years doing IRA -> Roth conversions in amounts that keep the taxable income at the lowest possible marginal rate. This shelters those conversions forever from RMD's and taxes for you and your spouse and from taxes for any beneficiaries although they will have to take distributions dependent on their age. Keeping the tax rate low also decreases the time needed to recover the tax impact of the conversion.
At 70 1/2 the RMD will limit the amount that can practically be converted and still stay in a lower tax bracket, but it can still be done for a few years. This gradual approach has allowed us to tax-shelter a very large sum and thus protect it from taxable RMD's. Recently, I have realized that since we could never rationalize long-tern care that we now have a bucket of "free" funds that could be used for health care.
An IRA -> Roth conversion can also look like a cloud with a silver lining when you are unemployed or your income drops significantly in any year. This is based on some pretty good personal exemptions and the standard deductions. It may be able to use some of those deductions that you might think that you have to "throw away" to eliminate taxes on smaller but still significant IRA -> Roth conversions. Boy, can that feel like making lemonade out of lemons! :-)))
Thank you for the clarification, Jerry. That helps lot. Interestingly, I just came across an article in Fidelity .com about how to estimate allocating your assets between traditional and Roth IRAs. I learned that I don't have to put as much into Roths as I thought did. Others may find this article useful so I posted a link to it on this forum at: "Keep more retirement income "
Chrysalis, you ask, “Is there any way to tax shelter that money either now or after we turn 701/2?” Probably your question is looking for a way to take distributions from tax-deferred, traditional IRA accumulations while still deferring paying income tax on the distribution. I don’t know of any way for you to take a distribution and not pay tax on it.
However, there is a way for money come out of a traditional IRA, and nobody pays federal income tax on it. You instruct your traditional IRA custodian to pay the distribution directly to a qualified charity.
The upside is that a charity that you like gets a donation. The charity does not pay tax on the donation. You probably did not pay tax on it before putting it in the IRA. The amount transferred to the charity will not be included in your income, so you will not pay tax on it then, either. The downsides are that it is not your money any more, you do not get the money to spend, and you do not get to claim a charitable deduction for it on your income tax form.
Granted, your question probably is not about charitable donations. I just wanted you know that this is available.
This little wrinkle in the IRA rules is not permanent. Congress has to authorize it every year. So far, they have.
Thank you, TS. I was not aware of that direct distribution to a charity option. I like the idea, especially since we have no heirs. Thanks for mentioning it.
You touch on a "tough" issue that I have posted on before in different threads. Charitable gifts, IRA's and trusts can be a formidable challenge, at least it was for me. Whereas, TS points out a means to do charitable gifts while one is still alive, we have an attitude more like spending the last dollar just before passing. Well, it's not quit that bad. We use a strategy that insures access to all retirement funds until the last spouse passes and we do have the kids to think about too. Sorting through this took me a few years of learning about our trust, about beneficiary precedence over trust statements and lawyers who mis-stated our charitable gift wishes which, of course, always ends up costing the client.
The beneficiary statements on all financial accounts, including insurance, take precedence over anything in your trust wording. So, make sure that you keep those beneficiaries updated regularly, especially if something takes place that affects them like deaths, marriages, births, etc.
Our particular issues arose due to our wishes to give charitable gifts based on percentages of our ESTATE and not just the TRUST. That approach along with a large percentage of our estate being in retirement assets which have beneficiaries and spousal goals and non-liquid assets like house, cars, etc. can be quite complex. And the solution I found requires repeated review to insure that the charities get their due and the trustee is not stuck trying to figure out how to find liquid funds to satisfy the gifts. I suggest that you discuss this in detail with your lawyer and seeking more advice if their eyes gloss over when you discuss IRA's, Roth's, beneficiaries, etc. GOOD LUCK!!!! :-)))
Not so many days remaining now. Awaiting the fullness of time (for Required Minimum Distributions).
"Automatic" we learned meant the calculation would be done automatically. When no Required Distribution had actually happened and we made contact to point that out, we made certain that the distribution itself would be (will be) automatic and not simply calculation (which we can do on-line - and I had done). Hers and his are supposed to take place the 13th (today).
Hopefully your 12/17/2014 post does not imply that you expected the RMD in 2014 and then the next post stating that you got it in 2015. That would present a tax situation that might be a surprise to you.
My post in 2014 reflected that I wanted the "automatic" Minimum Required Distribution to already be in place the last day of the year 2014 (when at the close of the market day the year-end balance would be "fixed"). As it turns out, what I was trying to accomplish by being pro-Active did not take place. Now we have made it happen, my spouse's second and my first. Direct deposit(s) should happen on or by Friday (tomorrow). I am not required to take one this year. My spouse (about four months older) was not required to take one the previous year. However, our doing this is meant to keep us from having to have two distributions (one person) on the first Federal Income tax return affected (we did not want to wind up with two in a single year). When we meet our CPA (late February, perhaps) we will know how things turn out for us this time around.
My mother who was a financial adviser before retiring in her mid-seventies has always kept a fairly aggressive portfolio, but she keeps at least a couple of years income in bonds or other stable assets. If it is a good year for the stock market then she takes her RMD out of her equities. If not, she uses her bonds or other safe assets. By doing it this way she managed to come out of the recent recession on top.
Very clever strategy! Thanks for the suggestion, smaneck!
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