Depends on your definition of disaster . My situation isn't a disaster but I will likely be paying upper 5 to 6 digit figures in federal income taxes when I have to start taking RMD's . Build a spreadsheet and plug in your Ira savings and expected income from other sources in retirement and use the latest RMD tables to project it. RMD's are taxed same as any other income except perhaps long term capital gains. rmd's also have a pretty big impact on Medicare premiums due to IRMAA. I didn't know about that component either and I wish I had. That one caught me totally off guard. IRMAA is a component of retirement that is beyond progressive taxation imo . Medicare premiums are on the order of triple someone who didn't save for retirement in tax deferred instruments after RMD's kick in. For me that's almost $400 per month incrementally in Medicare premiums.

If I had it to do over again I would have started putting some into Roth's as early as possible so my retirement income stream would have had a bigger tax paid component to it but of course there are constraints as far as what you can do if you are on the higher income range.

May be worth going and talking to a tax planner . I wish I had about 15 yrs ago. Based on your handle you have some time to address it as your'e 20 + yrs younger than me

You're well ahead of me because I didn't even know what RMD's were until a yr or so ago.

Yeah, I think anyone ignoring Roth on purpose is in all likelihood hurting themselves. We've been maxing Roth as long as we could to mitigate tax impacts. Still have the majority of our tax deferred portion of retirement in non-Roth dollars though because of time in market.

Agree. Roth's started in 1998 and I did
Myself no favors by not paying attention to what it was and how it might impact me down the road. You younger folks would do well to learn from geezers like me's mistakes .

Dunno where you are located but can you recommend a tax planner to talk with ? I'm in Huntsville so anything from the Woodlands to Huntsville or Huntsville to BCS would fit. I don't like to just cold call someone , prefer a recommendation . You never know what your'e gonna get just calling anyone that says they do tax planning on a website .

The Chicken Ranch said:

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Welcome to no longer being able make your 401k catch up contributions pre-tax. You'll get your tax increase and like it!

Thanks Republicans. You let this happen, and did nothing to stop it or reverse it. Disgraceful and despicable.

As usual, the middle aged middle class in their peak earnings get screwed. Both parties are to blame.

It's like every politician of either flavor has failed ECON 101. They want to collect the taxes now; not later after the asset has grown.

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I can tell you are the guy that is mad he does not get free drink refills.

The Chicken Ranch said:

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I disagree. Catch up contributions are only allowed for folks over 50.

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My politics are tax old people. You aren't paying enough.

halfastros81 said:

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Dunno where you are located but can you recommend a tax planner to talk with ? I'm in Huntsville so anything from the Woodlands to Huntsville or Huntsville to BCS would fit. I don't like to just cold call someone , prefer a recommendation . You never know what your'e gonna get just calling anyone that says they do tax planning on a website .

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Try Jason at Holistic Planning, he's in Nacogdoches. More of a CFP but he can talk through your options. I'm 51 and about to retire and I talked to him last year about my options.

topher06 said:

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Anyone have any idea what amount (assuming approaching retirement, which I'm not yet) would be too much to avoid RMDs being a disaster?

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I don't think there's a disaster scenario for RMD's... but you don't want to give the government any more than you have to.

For me, I'm married and want to avoid being bumped from the 24% tax bracket to the 32% tax bracket in retirement. That cutoff is currently $394,600/yr. Subtract ~ $75K/yr in SS income = $319,600. Multiply that by the RMD factor at age 75 (22.9) = $7.3M for a married couple.... half that if single.

*I'm not a tax expert or CFP.

Yeah, if you are in position where RMDs create a significant tax burden, I'd start by congratulating you that you likely did a good job of saving for retirement. Also note that if you were born after 1960, in 2033 the first year of RMD will move to age 75 (it just moved from 72 to 73). Now the earlier you are able to retire and extend the window between retirement and 73/75, that is your ideal window for Roth conversions. In most cases, doing it while you are working just pushes you into higher brackets where it's tougher to make the math make sense.

Sorry, halfastros, I am up in DFW. I'm a CPA so I've done most of the tax planning myself with the help of some software these planners utilize, but I did have it smell-checked by one. This will be a dynamic process pending several variables (investment performance, tax brackets, life events/wants where I may decide to withdraw beyond my normal budget), so I was also largely just confirming I was thinking thru all of the scenarios and how I would expect to adjust.

Thanks!

Thanks for the comments . I did ok but always looking to optimize now that I have time to think about it. Should have paid more attention to Roth's when I was still in the rat race.

Of course I was born in October 1959

Most high earners can't put money in a Roth IRA because they make too much, unless they use the backdoor rollover. I would gladly put money in a Roth IRA and not worry at all about paying taxes on the growth.

Disaster is a relative term. I retired at 65+2 mos but yr 66 taxes are still gonna be high because I got severance deferred to the next year . From 67 to 73 I'm gonna pay very low taxes because I'm living off of tax paid savings and investments and ultimately social security as well . When I get to 73 (God willing ) and RMD's kick in I'm gonna be right back into some forced high income and the high taxes that come with it. Had I put some of that traditional Ira and 401k money into Roth's when I could have the tax burden would have been less. Not the worst problem to have but not optimized.

There's also a fairly significant impact on Medicare premiums when your RMD income kicks in due to IRMAA adjustments . For me based on today… $5k per yr incrementally . That's a little "gotcha" I think most don't know about.

Cromagnum said:

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Most high earners can't put money in a Roth IRA because they make too much, unless they use the backdoor rollover. I would gladly put money in a Roth IRA and not worry at all about paying taxes on the growth.

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You've triggered me. I think it's more accurate to say that pretty much anyone can put money in a Roth IRA....there are just two different ways you can do it - directly and indirectly. Indirectly is two button pushes versus one button push for direct. Your income will determine which method to use so there is no "can't" when it comes to Roth contributions.

Just need to watch out for the Pro-Rata rule if you've already converted some stuff out of your employer accounts to your own accounts.

It's funny you posted this because I had the same thought the other day. The idea that there are income limits for Roth contributions is a misnomer.

Even if you officially phase out of a direct Roth contribution, you do the backdoor rollover through an IRA.

As you pointed out, the only caveat to this is if you've already rolled over a pre-tax 401k or 403b to a self-directed IRA. Then you probably don't want to do the backdoor.

Then there is the mega backdoor Roth. Only thing holding people back on this is whether or not their employer allows it. But, arguably, this targets high income earners, because who else can afford to put $70k+ (mostly) after tax in their 401k except for high earners.

deleted comment as it was not related to back door Roth conversion.

I am doing conversions from a pretax IRA (401k rollover) with a small percentage of after tax money in a traditional IRA so the pro rata rule is applicable to the current tax bills I pay on the conversions.

The problem with it is, if you do a backdoor Roth when you already have another pre-tax IRA, when you pay taxes for the year you make the contribution, it will be counted as taxable income. But you've already paid taxes on the contribution.

You will eventually get that extra tax back, but it's my understanding it's prorated over the life of your withdrawals.

In my case, I made this mistake in my mid-40s. So I paid taxes on a Roth backdoor contribution using money I'd already paid taxes on. I wound up having to pay about $1200 extra in taxes that year. Given my age, it's going to be 20-30 years before I get my money back.

No thanks. I didn't like paying the $1200 once; definitely don't want to pay it over multiple years. This is how I wound up looking into the mega backdoor Roth.

Edit: posted my response before you deleted yours.

halfastros81 said:

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Disaster is a relative term. I retired at 65+2 mos but yr 66 taxes are still gonna be high because I got severance deferred to the next year . From 67 to 73 I'm gonna pay very low taxes because I'm living off of tax paid savings and investments and ultimately social security as well . When I get to 73 (God willing ) and RMD's kick in I'm gonna be right back into some forced high income and the high taxes that come with it. Had I put some of that traditional Ira and 401k money into Roth's when I could have the tax burden would have been less. Not the worst problem to have but not optimized.

There's also a fairly significant impact on Medicare premiums when your RMD income kicks in due to IRMAA adjustments . For me based on today… $5k per yr incrementally . That's a little "gotcha" I think most don't know about.

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Thanks for the heads up on the IRMAA adjustments.... I didn't know about those, but I'm only 50 so not on my radar yet. Just trying to get everything pointed in the right direction now so I don't regret it later.

What about SS? If it still exists when I'm eligible, it sounds like taking it at 62 would be beneficial to lowering taxable income after RMD's kick in..... as long as it doesn't put me in a higher bracket at 62+.

I plan to take SS at full retirement age (66 yrs & 10 mos). Some people are unaware that your social security benefits grow at 8% per yr when you defer them and I can defer them to 70 (varies with birthdate I believe) and I had always planned to do just that but when I looked at the big picture and put it into options in spreadsheet form I decided that it's better for me to take it at full retirement age instead. The benefit of that is my tax deferred Ira's can continue to grow instead of being drawn down on. That's a bit of a do loop tho because the more they grow the more the RMD's will be and the more I'll pay in taxes at that point. That's where Roth's may have been a useful tool for me.

Something else that many people don't know is that your spouse can take half of your SS benefit at 65 as well. This of course assumes her benefit otherwise would be less than half of yours. My wife was mostly a stay at home Mom so that is the case for us.

Foamcows said:

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curious, but are you assuming the government wont continue to keep raising taxes? and thats what you are using in your decision on to go tax deferred or pre-tax? seems like a risky assumption.

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I had thought our Federal Government would raise income tax rates but they have literally decreased every decade since the 1980s. They could increase from here but it's not a forgone conclusion just based on history.

Now local and state taxes are a different story, unfortunately.

YouBet said:

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Cromagnum said:

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Most high earners can't put money in a Roth IRA because they make too much, unless they use the backdoor rollover. I would gladly put money in a Roth IRA and not worry at all about paying taxes on the growth.

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You've triggered me. I think it's more accurate to say that pretty much anyone can put money in a Roth IRA....there are just two different ways you can do it - directly and indirectly. Indirectly is two button pushes versus one button push for direct. Your income will determine which method to use so there is no "can't" when it comes to Roth contributions.

Just need to watch out for the Pro-Rata rule if you've already converted some stuff out of your employer accounts to your own accounts.

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Yep, just watch the Pro-Rata rule!