Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
We discussed these proposed changes a month or so back and some "in the know" said the proposals have no chance of passing.
I hope that's still the case. Requiring RMDs on Roths would be a huge change and upset the long-term financial planning of many - including myself. There's one argument against the Roth that says: Never pay taxes early. (I realize that's a minority view.) However, a tangible reward from paying taxes early for a Roth has been the exemption from the RMD. Now some would remove that exemption after the taxes have already been paid. At least, that's how the article comes across.
*This post and related link was dug-up from the Off-Topic Bullpen. It highlights the difficulty of trying to categorize posts as topical and non-topical. While the Roth and other tax deferred strategies may appear off-topic, I see them as inherently linked to fund investing. I'd venture to guess most (but not all) of the mutual fund accounts discussed here by individuals are held within some type of tax-deferred plan.
Added: Fund managers often take this tax-sheltered status into account in determining what to hold in the fund and how to manage the fund. Many very successful funds (especially ones focusing on dividend income or engaging in frequent trading) would be much less profitable for investors if held in non-sheltered accounts. Managers understand this distinction and invest accordingly.
@hank, I would agree there might be room for an additional category or two. Financial other than mutual funds would work with this topic. The Off Topic category becomes a black hole sometimes.
If this does pass it will be interesting to see if Roth IRAs lose popularity over time. I'm sure a lot of people are crossing their fingers hoping this does not go through. Calls and emails to Reps and Senators are in order.
Personally, our plan in retirement was to rely as long as possible on income from DB pensions & Social Security and to allow our modest tax-sheltered accounts to grow. We've tapped small amounts, to off-set major purchases, but prefer mostly to let the IRAs sit, knowing that in the later years (75-80+) our currently adequate DB income stream will no longer be adequate. We're not specifically protecting the money for heirs (though that would be fine) as much as protecting it for eventual use when pensions & SS can no longer keep up.
Food for thought: The traditional rules of thumb about withdrawing 4% or 7% ... (or whatever amount) each year in retirement assume that you have saved up the total needed for your subsistence and are currently living off that saved amount. When an IRA is used only to supplement existing DB income, than the conventional math goes out the window. That's because in the earlier years your DB income stream constitutes perhaps 75-85% of what you are living on. As those income streams get eaten away by inflation, larger and larger outlays from your IRA will be needed to close the gap. I'm not a mathematician. But my guess is that "exponential" might be the correct term to describe how that funding need will grow in the later years.
That's why for some of us, protecting our Roth IRAs from RMDs is important.
Where the government is losing out is in the payment of taxes on the "future earnings" one accumulates in a Roth account. That's huge for many, including myself, who opened Roth accounts as soon as they were available and maxed out contributions there ever since. Change that on current account holders and you become dead meat in my book. Requiring RMD's on Roth accounts would pull that money out from under that umbrella and maybe someone is thinking that the population of Roth account holders is small enough that it's worth whatever amount of present mayhem the measure creates. Good luck with that.
@hank, "our plan in retirement was to rely as long as possible on income from DB pensions & Social Security and to allow our modest tax-sheltered accounts to grow."
As I approach the ages of 59-½ and 62, I have been going over the scenarios in my head and the one you quoted above has been my thinking also. The only downside is that most experts tell you to wait on your SS until FRA. For me that is 66-4. If I take SS at 62, my thought is that my rollovers will hopefully accumulate gains instead of spending down. The problem is there are too many unknowns in the equation. For instance, what if there is a bear market? If I have made my calculations correctly, my break even of taking SS at FRA would be age 71. That is calculated by multiplying my monthly SS by 54 months, (time from age 62 till 66-4)
I also have my wife to consider. That leans me more to taking SS at FRA.
Thanks for taking this thread out of the bullpen. It has spurred a good conversation.
I also have my wife to consider. That leans me more to taking SS at FRA.
Your wife (depending on her age compared to yours) can collect early on your SS (spousal benefit) if you "file and suspend" SS for yourself. She is entitles to half of what you would be receiving.
There are many scenarios and many moving parts so familiarize yourself with them.
My favorite is the gal who never worked (no SS contributions), but "suffered" through 4 marriages with 4 different men with each marriage lasting at least 10 years. She is now single and in her sixties. She gets to chose which ex's SS record to file her spousal benefit on. In fact, four different women could file on the same ex. Men can do the same if the wife or "10 yr ex-wife" were the higher earner.
From linked article:
"For most married couples, for instance, delaying benefits until 70 for at least the higher earner is a no-brainer. By coordinating the dates they each claim benefits to take maximum advantage of spousal and survivor benefits, a husband and wife can boost lifetime benefits by hundreds of thousands of dollars."
Will see how this will play out. It is really unfortunate that the government is trying to reduce the debts by taxing Roth IRAs. What about all those corporations who move their headquarters to countries outside US in order to avoid paying their fair share of taxes.
With respect to your second point Maurice companies in the US are entitled to operate and function in the freest market in the world with all of the advantages this nation has to offer. Their profits should be taxed and paid to the country that allows/enables them to function under those circumstances. Their claims otherwise, while legal under current laws, are ridiculous. If you're based here, using our roads and bridges, attending or otherwise taking advantage of our educational system, our infrastructure, our healthcare, our freedoms, etc., etc., then pay up.
Companies cry about paying their workers but continue to shell out inordinate amounts to CEO's. They whine about taxes and healthcare costs - maybe if they paid them rates would be lower for everybody. They've gutted the middle class in this country and continue to whine for more. It's getting old.
Over the years when I was in a 15% tax bracket, I took a number of Traditional IRAs, converted them to Roth IRAs, and paid the tax.
If Obama's 2015 budget goes through with the RMD change, does this mean I will pay tax a second time on these monies at 70 1/2 or does it mean I would need to take an RMD, but it would not be taxed a second time?
I do realize that with an RMD the proceeds would then go into a taxable account.
@Mona - if the proposed RMD changes go through and you reinvest your RMD you wouldn't be taxed on the withdrawn distribution but you would be taxed on the earnings , if any, made by your reinvestment. Under current law those earnings are tax free and the earnings on those earnings remain tax free as long as they remain within the Roth account.
"They are probably trying to assure that Roth funds keep a retirement character."
Hi Anna:
Afraid I'm missing your point somewhat. I do understand that the intent of the existing IRA provisions is to allow individuals to save for and fund their own retirement, rather than to accumulate large amounts of wealth to be passed on to heirs. So it's understandable from that standpoint that there exist Required Minimum Distribution (RMD) requirements, which for most participants kick-in at age 70.5. The amount one is required to withdraw initially is small and gradually increases each year thereafter.
However, people have varying needs for funding retirement. As I noted earlier, if the IRA money is relatively modest in amount and viewed as a supplement to a defined benefit pension and other income streams, than the RMD at 70.5 places a hardship on some individuals. They may not yet need the money at age 70.5, but however, depending on inflation, could find themselves in dire straights 10 years later when their other sources of income can no longer keep up.
I think the present two-tier IRA approach achieves an important balance. Those for whom RMDs at 70.5 pose no particular problem can elect to contribute pre-tax monies and have a traditional IRA. Those who perceive a need to post-pone taking distributions beyond 70.5 can elect to invest after-tax monies (a costlier option) in a Roth and gain that advantage. Our own investments are pretty evenly split between Traditional and Roth, so we were planning on taking some RMDs at 70.5 - just not as much as the new legislation would require.
As the dialogue between Mona and Mark suggests, people can still reinvest the (withdrawn) RMD money into a non-sheltered account if they desire. That's what I would do if forced to withdraw Roth money earlier than needed. However, the tax-free growth of the money would be lost. It would impose additional money transfers and paperwork. And the funds would no longer be co-mingled with the IRA money, so some would find managing accounts more difficult. I do think Mark and others have it right here. The government isn't looking out for our best interests, but is simply trying to make up funding deficits - even if it means changing the rules of the game in mid-stream.
I do say things in shortcut (cast on one arm and one finger typing with other).
But I was making a mental analogy to the Whitehouse's angst with Social Security's file and suspend:
"The administration hasn't offered much elaboration, but a White House official, speaking on background, confirmed to me that the target is a benefit claiming strategy known as file-and-suspend - a twist on the more straightforward strategy of delayed filing to earn a higher monthly benefit down the road. Although it's technically available to anyone, the White House thinks the strategy is being used to unfair advantage by high-income seniors and wants to shut it down because of the added benefit cost it imposes on the Social Security program."
Comments
I hope that's still the case. Requiring RMDs on Roths would be a huge change and upset the long-term financial planning of many - including myself. There's one argument against the Roth that says: Never pay taxes early. (I realize that's a minority view.) However, a tangible reward from paying taxes early for a Roth has been the exemption from the RMD. Now some would remove that exemption after the taxes have already been paid. At least, that's how the article comes across.
*This post and related link was dug-up from the Off-Topic Bullpen. It highlights the difficulty of trying to categorize posts as topical and non-topical. While the Roth and other tax deferred strategies may appear off-topic, I see them as inherently linked to fund investing. I'd venture to guess most (but not all) of the mutual fund accounts discussed here by individuals are held within some type of tax-deferred plan.
Added: Fund managers often take this tax-sheltered status into account in determining what to hold in the fund and how to manage the fund. Many very successful funds (especially ones focusing on dividend income or engaging in frequent trading) would be much less profitable for investors if held in non-sheltered accounts. Managers understand this distinction and invest accordingly.
Just an observation & not a criticism.
If this does pass it will be interesting to see if Roth IRAs lose popularity over time. I'm sure a lot of people are crossing their fingers hoping this does not go through. Calls and emails to Reps and Senators are in order.
Personally, our plan in retirement was to rely as long as possible on income from DB pensions & Social Security and to allow our modest tax-sheltered accounts to grow. We've tapped small amounts, to off-set major purchases, but prefer mostly to let the IRAs sit, knowing that in the later years (75-80+) our currently adequate DB income stream will no longer be adequate. We're not specifically protecting the money for heirs (though that would be fine) as much as protecting it for eventual use when pensions & SS can no longer keep up.
Food for thought: The traditional rules of thumb about withdrawing 4% or 7% ... (or whatever amount) each year in retirement assume that you have saved up the total needed for your subsistence and are currently living off that saved amount. When an IRA is used only to supplement existing DB income, than the conventional math goes out the window. That's because in the earlier years your DB income stream constitutes perhaps 75-85% of what you are living on. As those income streams get eaten away by inflation, larger and larger outlays from your IRA will be needed to close the gap. I'm not a mathematician. But my guess is that "exponential" might be the correct term to describe how that funding need will grow in the later years.
That's why for some of us, protecting our Roth IRAs from RMDs is important.
As I approach the ages of 59-½ and 62, I have been going over the scenarios in my head and the one you quoted above has been my thinking also. The only downside is that most experts tell you to wait on your SS until FRA. For me that is 66-4. If I take SS at 62, my thought is that my rollovers will hopefully accumulate gains instead of spending down. The problem is there are too many unknowns in the equation. For instance, what if there is a bear market? If I have made my calculations correctly, my break even of taking SS at FRA would be age 71. That is calculated by multiplying my monthly SS by 54 months, (time from age 62 till 66-4)
I also have my wife to consider. That leans me more to taking SS at FRA.
Thanks for taking this thread out of the bullpen. It has spurred a good conversation.
There are many scenarios and many moving parts so familiarize yourself with them.
My favorite is the gal who never worked (no SS contributions), but "suffered" through 4 marriages with 4 different men with each marriage lasting at least 10 years. She is now single and in her sixties. She gets to chose which ex's SS record to file her spousal benefit on. In fact, four different women could file on the same ex. Men can do the same if the wife or "10 yr ex-wife" were the higher earner.
From linked article:
"For most married couples, for instance, delaying benefits until 70 for at least the higher earner is a no-brainer. By coordinating the dates they each claim benefits to take maximum advantage of spousal and survivor benefits, a husband and wife can boost lifetime benefits by hundreds of thousands of dollars."
strategies-to-boost-your-social-security
Companies cry about paying their workers but continue to shell out inordinate amounts to CEO's. They whine about taxes and healthcare costs - maybe if they paid them rates would be lower for everybody. They've gutted the middle class in this country and continue to whine for more. It's getting old.
Over the years when I was in a 15% tax bracket, I took a number of Traditional IRAs, converted them to Roth IRAs, and paid the tax.
If Obama's 2015 budget goes through with the RMD change, does this mean I will pay tax a second time on these monies at 70 1/2 or does it mean I would need to take an RMD, but it would not be taxed a second time?
I do realize that with an RMD the proceeds would then go into a taxable account.
Thanks.
Mona
"They are probably trying to assure that Roth funds keep a retirement character."
Hi Anna:
Afraid I'm missing your point somewhat. I do understand that the intent of the existing IRA provisions is to allow individuals to save for and fund their own retirement, rather than to accumulate large amounts of wealth to be passed on to heirs. So it's understandable from that standpoint that there exist Required Minimum Distribution (RMD) requirements, which for most participants kick-in at age 70.5. The amount one is required to withdraw initially is small and gradually increases each year thereafter.
However, people have varying needs for funding retirement. As I noted earlier, if the IRA money is relatively modest in amount and viewed as a supplement to a defined benefit pension and other income streams, than the RMD at 70.5 places a hardship on some individuals. They may not yet need the money at age 70.5, but however, depending on inflation, could find themselves in dire straights 10 years later when their other sources of income can no longer keep up.
I think the present two-tier IRA approach achieves an important balance. Those for whom RMDs at 70.5 pose no particular problem can elect to contribute pre-tax monies and have a traditional IRA. Those who perceive a need to post-pone taking distributions beyond 70.5 can elect to invest after-tax monies (a costlier option) in a Roth and gain that advantage. Our own investments are pretty evenly split between Traditional and Roth, so we were planning on taking some RMDs at 70.5 - just not as much as the new legislation would require.
As the dialogue between Mona and Mark suggests, people can still reinvest the (withdrawn) RMD money into a non-sheltered account if they desire. That's what I would do if forced to withdraw Roth money earlier than needed. However, the tax-free growth of the money would be lost. It would impose additional money transfers and paperwork. And the funds would no longer be co-mingled with the IRA money, so some would find managing accounts more difficult. I do think Mark and others have it right here. The government isn't looking out for our best interests, but is simply trying to make up funding deficits - even if it means changing the rules of the game in mid-stream.
Just some thoughts.
But I was making a mental analogy to the Whitehouse's angst with Social Security's file and suspend: 'File-and-suspend': A Social Security strategy under fire
Anyway, just a thought - not really important to the bottomline result.