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When Clients Work Past 70, RMDs Are Still Required — And Begrudged
That would have been remarkably prescient as IRAs were created in 1974 by ERISA.
Originally there were no RMDs. They were created as part of the Tax Reform Act of 1986.
From the latter page:
It would be an interesting stat to compare present day tax savings in the year that the IRA contribution was made to the tax liability on that contribution (and its potential investment growth) over time. The longer that we have for investments to potentially grow the better the potential outcome.
If I pay taxes on $100 at a rate of 20% in the year I earn that income I net $80 after taxes. If instead, I let the $100 grow tax deferred and I remain in a 20% tax bracket in retirement the government stands to collect not only it's initial 20%, but also 20% of any growth that the $100 made. I keep 80%.
It seems to me that the closer one is to withdrawing IRA funds (whether RMD or not) the less impactful (investment success) these tax deferred contributions can potentially be.
In fact, if you were one year away from retirement withdrawals and that $100 tax deferred contribution fell in value to say $50 (that would suck for you) and then it was withdrawn from the IRA, the taxes collected would be halved as well (that would suck for Uncle Sam).
This is why contributions made closer to retirement should be carefully invested on the risk spectrum. Those dollar potentially have less time to grow meaningfully.
My dense brain required two readings to grasp all of this. Spot-on, except the very last couple sentences aren’t quite computing for me. (“This is why ...”)
If I may restate your observations, I believe you’re highlighting the fact that when we invest in tax deferred accounts we are also investing on behalf of the government. That’s because eventually Uncle Sam does get to tax our contribution and in addition any growth on that contribution that has accrued over the years. As you note - your success and that of the government’s rise or fall together.
Overall the government may be seen to be riding on our backs and sharing in (what ought to be) our long term investment success. I continue to like Roth IRAs for the reason being you get to keep whatever you’ve earned over the years. And, if someone wants to roll the dice and do a later life Roth conversion into an asset they think has been unjustly beaten down and stands to rebound - than BINGO - you get to keep 100% of your winnings.
Also add in your income, which will include up to 85% of your Social Security income. Add other incomes in there and you might end up with a big taxable income. Then with that big taxable income, your Medicare part B & D might cost a lot more.
Next year is my RMD, but my tax deferred income is fairly low as I've been contributing to my Roth since it began. The rest is in taxable. I went to 95% cash on my IRA to keep the taxes down. My taxable and Roth do the heavy lifting.
“Congress passed and President Reagan signed into law the 1983 Amendments. Under the '83 Amendments, up to one-half of the value of the Social Security benefit was made potentially taxable income.” https://www.ssa.gov/history/taxationofbenefits.html.
A pension (with cola) has pushed me over 20+ years into a higher tax bracket than I expected when working. The % taken doesn’t seem appreciably lower than during the working years. In addition, Michigan also levied an income tax on pensions - previously exempt.
I think when it comes to this kind of dynamic (figuring out what tax bracket you’ll be in 30 years down the road) you’re best to play it safe. No one really knows. I’m not sure using a Roth at an early age is the answer. Might be. But if, as a seasoned investor, you can play the percentages and convert a portion into an asset you think is undervalued - it’s worth paying those taxes a few years earlier than you might have otherwise and doing the conversion (in stages over several years).
BTW - Roths aren’t subject to RMD. What’s not to like?
It seems that you can if you are still working for the same employer/company as you've always been and there seems to be a few other work arounds as well.
I converted all of my IRA's to Roth IRA's back when the Roth's became available so I really haven't kept up on this topic.
Here's one from Forbes in May, 2018 to get you started:
It is true that one can delay RMDs from an employer retirement plan before retirement. The article was discussing RMDs for IRAs though ("It's ridiculous that the IRS forces them to begin withdrawing from their IRAs"). One cannot delay RMDs for an IRA - that's the point of the article.
" It is said that the IRS has never defined the term "still working""
That's correct, since the term "still working" doesn't appear in the IRC or in the regs. The expression used in the Regulations is "retires from employment with the employer maintaining the plan" (401(a) and 403(b)). In plain English it's essentially the same thing, so perhaps a distinction without a difference.
Again, this RMD exception applies only to employer sponsored retirement plans, not to IRAs.Note that employers have the option of imposing RMDs at age 70½ even on current employees. That could be a source of some of the confusion.
Regarding "April 1 of the year after one turns 70.5", that's not too complicated, though the ramifications may be. If you turn 70½ in 2019, you have an RMD this year. Your deadline for this first RMD is April 1 of the next year, 2020.
That can lead to two RMDs in the same year 2020, one for 2019 and one for 2020. That would boost your income in 2020. That's your choice, how you plan your taxes, just as bunching deductions every other year is your choice, how you plan your taxes. The IRS is giving you flexibility. If it's confusing, just ignore the flexibility and do everything on a calendar basis.
You raised two new questions: does this cover all types of employer plans, and what about continuing to contribute.
If I may offer a side comment, I think Congress went a little wacko in creating all these hybrid plans, SIMPLE, SEP-IRA, SARSEPs. There are "clean" employer plans, 401(k)s, 403(b)s. There are IRAs. Then there are these genetic mutations. I try not to look at them unless I have to (and I have had a SEP IRA).
Apparently they (SEPs and SIMPLEs) follow the IRA RMD rules. No exceptions. See
Can you continue contributing? Something that I was never worried about, but a quick search turned up this ThinkAdvisor piece. If it is to be believed (I haven't checked tax code, etc. to verify), you can continue contributing to 401(k)s, and the employer must continue contributions to SEPs. But you can't contribute to a traditional IRA. But, but, you can continue contributing to a Roth IRA.
Is this anyway to run a tax code?