How To Get Your RMD's 100% Tax-Free
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- čas přidán 12. 09. 2024
- In today’s video we’re going to talk about how to get your Required Minimum Distributions 100% tax-free. If you have money in any sort of qualified plan such as a 401k, IRA, etc., there will come a time when the IRS forces you to take that money out. That's called a required minimum distribution (RMD). Is there a way you can receive that RMD and spend it without paying tax? Let's discuss.
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The goal is to maximize the after tax income, not to minimize taxes.
So take a $1 million 401K and reduce it down to $350,000, sounds simple enough. But I would be paying taxes on the $650,000 reduction or Roth conversion. Seems like you missed that point in your video. Nice concept but not too applicable on higher 401k balances.
You wouldn’t convert it all in one year. Stretch the tax obligation out over 7 or 8 years and stay in the 24% bracket or lower.
@@DavidMcKnight If you have an amount, $5M or more, in 401k/traditional IRA, converting to Roth IRA would still be costly (taxes) , and it would be difficult to get to those low levels to zero out RMD taxes, SSI taxes, etc. unless I'm missing something?
These are ballpark numbers, I'd never use my real numbers here!
For example,
Let's say I plan to retire at 65; I have to pay RMD at 73; at 65, I have $5M in 401k / Traditional IRAs; if I try to convert $4M of that in 7 years, I need to withdraw nearly $572K a year, which is close to $167K in Federal taxes alone in the 35% bracket or whatever it will be when I'm 65+.
If you leave that $5M in your traditional 401k/IRA, and it grows roughly 5% per year for 7 years until RMD, even taking out $180K year for 7 years, that's a balance close to $7M at 72. At 73, using a life expectancy factor of 26.5, my RMD at 73 is going to be around $264K, with Federal tax around $59K
It will be difficult to stay at or below the 24% tax bracket; if I take out say $180K per year from 65 to 72, that's a reduction of $1.26M, and my tax deferred accounts already grow much more than $180K per year on average.
If someone knows a strategy to minimize taxes over your lifetime, when your tax deferred account balances are >$5M, and you have 7 years before RMD I'd like to hear your ideas. 😎
Acquiring a stock is easy, but buying the right stock without a time-tested strategy is incredibly hard. Hence what are the best stocks to buy now or put on a watchlist? I’ve been trying to grow my portfolio of $160K for some time now, but my major challenge is not knowing the best entry and exit strategies. I would greatly appreciate any suggestions.
@hauwabello2167 Since risk is at an all-time high right now, perhaps you should be a little more patient and return when it has decreased. Alternatively, you can consult a trained financial expert for strategy.
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What a genius. I should get rid of most of my money so that I have hardly any left...that will move me into poverty level, and enable me tax free retirement. Amazing... CZcams is full of such experts.
What a wild mischaracterization of what this video is about. Nice work.
@@DavidMcKnight Suggesting I need to reduce my nest egg down to a certain level in order to reduce my taxes is something any captain Obvious knows...and every Joe the Plumber.
@@kmiller5808 Roth IRA is great for young people whose retirement is decades away. Pay taxes as you feed it, and pay no taxes later upon collecting.
Suggesting Roth conversion to someone who is 72/73 year old is lame at best.
@@DavidMcKnight he's right...whats the point of building a large nest egg only to widhtdrawl next to nothing anyway
@@samkitty5894 I would say it does vary case by case.
One example would be right now. We're staring down the barrel of the end of the Trump tax reductions. It might behoove someone already in retirement to max out their current tax bracket (or possibly the next one, depending how low they currently are) and make those conversions.
The other question is one of longevity. If both of the retiree's parents and most of their uncles and aunts lived into their 90s, it might be wise to do some converting.
Definitely don't just throw everything into the conversion process tho. Weigh and measure how much is appropriate.
Reading some of these comments, a lot of them are missing the point. This is about reducing withdrawals from taxable accounts, and having more withdrawals/income from tax free accounts. This is absolutely my plan as there is no way tax rates are not higher in the future.
Would think anyone watching you would already know the standard deduction serves as the threshold for rmd to avoid any taxes.
You’d be surprised.
Hype post … yes, if your ssc benefit and your traditional IRA balance is low enough, you can avoid taxes. Not news. Roth Conversions do not avoid taxes - which was also not the claim here. With the supplemental income brackets being frozen since day one, some taxation of SSC is almost guaranteed even without additional income RMDs.
The news here is you should not convert your entire IRA to Roth even if you think your tax bracket will be higher down the road. There is a minimal balance you should keep in tax-deferred to take advantage of the standard deduction and maintain tax-free social security. This is news to many people and hardly hype.
some of us have annuities, pensions, and bank interest that matters since the interest rates are 5%
Standard deduction for retirement is great, your info on how much of a Roth conversion is needed is great for planning.
Thanks for watching!
Thank you David for this valuable education
You’re welcome!
Great / informative video - as are the others you have presented that I have watched. If I am understanding you, one should only pay taxes to convert IRA / 401K funds to ROTH if they can maintain that conversion in the 10%-12% tax bracket. Why would anyone convert funds in the 22-24% brackets if they are trying to maintain an annual income that is taxed at - 0% - 10% - 12%? I am not saying that you are conveying that, but there are CFPs on CZcams that are. Another factor I have noticed while researching conversions is how much portfolios continue to grow when averaging 5% annual growth or more and you are only withdrawing 3.65% (which is an estimated figure I assume....I believe I read an IRS table that has an amount your IRA balance is divided by each year - 26.5 @ 73 for me and reduces from there) - your RMDs will keep increasing
You would convert to the 22/24 if you thought that either your income was going to be higher in retirement (maybe because of a pension) or you think the government will dramatically raise taxes to service the exploding debt load.
How about the SS benefit?
If you are making less than the standard deduction during retirement you are NOT living in a house, wearing shoes, or eating food every day! I would opt for being as tax efficient as possible. Some people make ridiculous choices to avoid taxes. I knew a lady whose house was paid of and she got a HELOC for no other reason than a tax break! She and her husband missed the tax break! So she was getting 15 cents back on every dollar of her own money she was borrowing!
What if the rest of your money is in Roth IRAs?
I think you are missing the whole point. Set up your taxable income so it falls into the 0% tax bracket and supplement that income with your ROTH distributions to satisfy your lifestyle. But that is a fine line to walk as well.....I read about those paying 22-24% taxes to convert yet they could adjust RMDs so when combined with SS they fall in the 10-12% (or whatever those new brackets become) thus converting less while in higher tax brackets prior to RMDs
Every third year we will fund a Donor Advised Fund above the standard deduction. Then we will use DAF for charitable donations in the two off years. In 2026 there is a chance the standard deduction will revert to a lower amount, which will make it easier to itemize.
Current law is that the standard deduction will revert to its pre 2018 amounts, adjusted for inflation but they will add back in the personal exemptions which will get us roughly back to where we started.
so, what to do with my other income (interest, dividend, rental income)? They all count towards the total income along with SS and roth conversion
If you wanted to get to a 0% tax bracket you’d have to sell your rental properties and shift most of your assets to tax free by way of Roth vehicles and cash value life insurance.
@@DavidMcKnight- great. So trash all of your income just so you don’t have to pay tax on your income? Do you even understand how stupid that is?
@@1wheeldrive751re-read my response before you start hurling invectives. I said IF. I didn’t say they should.
There is no tax free situation. When you reduce your IRA or 401k by either spending it or converting to a Roth, you pay tax on that. QED !
What if a distribution is offset by your standard deduction?
So, your supposition is, have a paltry amount of retirement funding so you avoid paying income tax, as opposed to being wealthy with a big income (that will have income tax)? That is the silliest nonsense I ever heard in my life.
Sigh. Sounds like you didn't watch the video. Yes, leave a paltry amount in your IRA so as to have RMDs offset by the standard deduction but shift everything else to your tax-free bucket (Roths IRA ,etc.) to shield yourself from higher taxes.
@@davidmcknight8201 I watched the whole video. If you cash out some/most of your IRA for Roth conversion, then you are paying humongous income tax the year you make that conversion. So, a person would probably pay even more tax that way. Ridiculous.
@@tommak6516 Well now you're shifting the goalposts on me. Are you saying there is never a scenario where someone might pay higher taxes in retirement and therefore there is never a justification for doing a Roth conversion because they would "probably pay even more tax that way."? Are you oblivious to all of the economists who have predicted that tax rates will have to double to pay for SS, Medicare and Medicaid and Interest on the national debt?
@@davidmcknight8201 I am not shifting anything. Now your argument is predicting what may (or may not) happen in the future with tax rates. I thought you were supposed to be a financial advisor, not a psychic.
I’m no psychic but I believe the experts and so should you:
8 Experts Who Say Taxes Are Going Up!
czcams.com/video/3kjvLEhJrBg/video.html
Liked and shared. Thank you for the content and knowledge sharing 🙏
Thank you!
Will likely claim joint income standard deduction.
Also if you are married and each spouse gets $30k per year in SS benefits then you have to have even less in your 401k to pay zero tax.
That is correct. In fact, at that point, it is near-impossible to be in the 0% tax bracket.
if you undocumented, everything is tax free
But this doesn’t make sense. Roth conversions are taxed and they are taxed at the time when my salary is at the highest. So you’re saying pay way higher taxes in order to have a small amount of taxes when I’m not making much. This doesn’t seem to make much sense. Please explain.
I wouldn’t pay taxes at any rate above 24% and I would only do so if you believe the experts who say tax rates will have to double to pay the interest on our nation’s exploding debt load and $239 trillion shortfall for entitlements.
This is no answer to the question!
@@philip5899if tax rates stay level then she’s absolutely correct. If they double as many experts are predicting then it doesn’t make sense.
Wrong - you're not getting RMD tax free. If you're smart, take money from your retirement fund BEFORE you have to take RMDs. That way you can stay in the lower income bracket of 10 or 12%.
If all of your other streams of income are tax-free (Roths etc.) and your RMD is offset by your standard deduction, and you are paying zero tax, explain to me how in that scenario the RMD is not tax-fee.
Converting a regular Thrift Savings Plan account to a ROTH Thrift Savings Plan account in retirement is very confusing. I do not know where to begin.
Can you talk to your resource person?
PoZ QoD: standard deduction
Got it!
Your aren't saying anything anyway. I don't pay taxes on my RMD because my income is modest and I don't even spend it all. My RMD goes to my pretax account.
So you’re still working?
Thank you! Glad I found your channel. Can I ask? My Rollover IRA has many treasuries, in addition to stocks and ETFs. I want to convert the IRA to ROTH. The treasuries unlike stocks, do not have state taxes. So how the treasuries are taxed during the ROTH conversion?
If they’re in your IRA it would be ordinary income tax rates.
@@DavidMcKnight Thanks for the reply! If I understand correctly, this is not good, it means I am losing the no-state tax advantage when I buy treasuries inside my IRA. I probably made a mistake doing it. I should be buying the treasuries in my ROTH, and taxable assets 9stocks, etfs, cds) in my IRA.
@@ninelr222 I’d buy corporate bonds in your Roth instead because you’ll be getting greater returns.
@@DavidMcKnight Ah! Thank you!
So simple, your growth in your IRA is not tax until you withdraw or convert to roth. So, it does not matter if it is taxed for state. When you withdraw, it will be ordinary income.
Military pension along with SS and retirement accts, I guess I'm paying some taxes then.
Yep, no way out of it unfortunately.
Statutory W2 Employee - going to itemize this year and every year
Sounds great!
Why? SALT deductions are limited to $10,000. Standard deduction is $27k+(married). Do you have big mortgage, medical and charitable deductions?
Unbelievable you did not address if you are getting SS the "income" increase since the standard deduction is below the line. So you max number is too big.
Thanks for your comment. Not sure what part you’re referring to but the ideal balance is about $350k for married couples which would get most people their RMDs and SS tax-free.
@@DavidMcKnight Your RMD is not tax free in itself, your write-offs make it tax free. So its true bottom line, but for a different reason. I paid no income tax for years because of just the standard deduction and carryover loses, with no RMDs. Also capital losses and tax credits can bring ones taxes down to zero.
Doesn’t your social security count as income in addition to your RMD?
Only if you breach your provisional income thresholds.
Most people will get their RMDs 100% tax free, because most people have no retirement savings.
Thanks for your comment. This is true. My comments are more directed towards folks who will be on the IRS’s radar.
This is B.S. No matter what the amount your 401k or TIRA you still get the standard deduction so the amount of your RMD up to your standard deduction is "tax free". If you do Roth conversions to lower your TIRA or 401k balances you have to pay taxes on those conversions. So, this explanation is B.S.
My God, what a bunch of horse hockey. Because everybody with a sizeable IRA has essentially poverty level income in retirement. Geez. Forget about having a pension, annuities, dividends and interest, and Social Security.
Almost like you didn’t watch the video. If you have the lion’s share of your income coming from Roth IRAs and just your RMDs being offset by your standard deduction, you would have plenty of money to live on.
@@DavidMcKnight No kidding, Captain Obvious. And like I said, a person who has been able to set aside large amounts of money for retirement is going to have other sources of income in retirement and is not going to be in a near poverty situation in retirement.
@@DavidMcKnight Just minimize your RMD income tax by being generous and taking advantage of the Qualified Charitable Distribution option.
I’ve met with thousands of people over the years and for those not blessed with your native intuition, it isn’t always obvious.
This guy can't be for real. First of all he assumes that people are living on social security only and doesn't include anyone getting pension money. His claim is that you should plan on converting money from your 401K to a Roth prior to age 72. His example takes a $1.5 M retirement fund and he wants to reduce that to $786,000 with the balance going into a Roth conversion. Assume you start this at age 66 up to age 72. That means you have to include $119,000 per year as income. That puts you into the 22% bracket. You still are also taxed on social security. He conveniently leaves out that you can't touch any conversion gains for the 5 year waiting period. In other words his claim is essentially useless. You pay taxes one way or the other. What harm is the tax bill for some poor couple trying to live on a measly $30,000 per year? Nice try pal but I don't buy the well digested bull fodder.
Thanks for your comment. Only about 20% of people have pensions and, you're right, those people would not get their RMDs tax-free. I address pensions in Chapter 7 of The Power of Zero. You are taxed on SS during the conversion period, but once it's over, your SS would be tax-free or largely tax-free, depending on amounts. Finally, if you're only living on $30k a year, this video would not likely apply to you. People who have $1.5 M in their IRA will not likely be living on such small amounts.
Isn't the standard deduction you are using to high? The Trump chnages will sunset.
But they’ll add back in the personal exemptions which they took away in 2018. So it will all end up about the same.
Snake oil.
How so?
Thanks for nothing this didn’t help at all.
So sorry.
I've got $4 million in my 401 K and my IRA's, so I'm screwed unless I find an economic investment that throws off large losses.
@@Superman-ey3id You are well off and just need to pay your tax and then live happily.
Sd
The stupidest thing I have ever heard …don’t save more than 700K in your 401K in order to pay no taxes….what a crazy idea…..I would rather have 2million in my 401k and pay taxes, and will be living like a king…
What if you had the extra $1.3 M in your Roth IRA? In a rising tax rate environment? I think you misunderstood the video.
this guy is soo full of crap. Your goal should be yo minimize taxes over your lifetime, not zero when you are old! Why pay 22% tax NOW, when you can pay 10% now and 10% later in retirement. the whole premise of this video makes no logical sense and it it not optimized at all.
What makes you think that with $239 trillion in unfunded obligations and nearly every economist saying that we need to double our tax revenue to honor our obligations that your tax rate will be 10%? And what happens when your RMDs force you into a higher bracket? 10% is a good deal of historic proportions and it won’t last long.
This is click bait. No productive ideas at all
You knew the ideal balance to have in your IRA before watching this video?
I think just about everyone here says this guy is crap 💩!
So you CAN’T use standard deductions to offset RMDs in retirement? Explain which part of that is not true.