How to Avoid the RMD Tax Trap: Protect Your Lifetime of Tax Savings

[@dlg5485]

A lot of people glamorize rental properties as a retirement income stream, but they neglect to mention the headaches that a landlord constantly has to deal with. And hiring a management company carries a huge cost that may eat up all of the profits. To each their own, but I have no interest in being a landlord. To me, retirement and work are incompatible. I have more than enough ideas to fill my time, my investment portfolio, soc sec, and a small pension will provide all the income I need.

[@kersting13]

One thing that I think these examples always miss are medical insurance costs for dependent children. This guy has 7 kids and ALL of them are currently under 26. If he retires in a year or two, his insurance costs are not going to be just the $6092 for him and his wife, he's going to need to have a "family" insurance plan all the way until he's on medicare - over a decade from now. Maybe the software does that for him, but all I see on the screen are the costs for him and his wife.

[@beckpe]

Thank you James and Spencer. Incredible example of how to think about one's full retirement to ensure account, investment and withdraws are thoughtful and well-balanced. Spencer thanks for sharing your story.

[@danielhurst8863]

One thing that should be mentioned in this kind of analysis is that while distributions from a Roth account are tax free, if you pass away with money in the Roth, it still counts as value in your Estate. If a single person person an Estate, outside the Roth, of $13 million, and a $15 million Roth, there would still be the 40% Estate tax on that $15 million. You need to keep in mind potential estate taxes, especially because the exemption amount may reduce to $2 million. Because Roth accounts are not subject to RMD, sometimes people let them grow, but you need a strategy to transfer those assets before death, to avoid the Estate Tax on them.

[@watchingu83]

This video was very informative! It certainly highlights the importance of working with a financial advisor to maximize income and mitigate tax burden in your future years of retirement. Thanks for posting, I look forward to more great content like this!

[@heidikamrath1951]

Amazing example! Thank you James and Spencer! Kudos, Spencer in what you have managed to save/invest/accumulate so far, especially given you have a family of EIGHT! My biggest takeaway is how significantly the RMDs could increase your income in a scary way wrt taxes. Seeing it in both table and graph format was eye-opening. Yikes!!

[@rick_vv7754]

Having rental properties is nice but selling them is going to add some tax complications due to capital gains and the depreciation recapture which will cause spikes in income and capital gains which will effect income taxes, NIIT and either health care costs or IRMAA in retirement. If they keep the properties, they will get a step up in basis upon them passing and no taxes for their heirs. All distributions from the qualified accounts will always be ordinary income except for QCDs. Inherited qualified accounts have to be distributed within 10 years for non spouse.

[@timpedone3303]

Wouldn't a more complete plan take into account loss of ACA subsidies since he's going to retire before 65? For example, the effective "tax" rate of the ACA subsidy loss would equate to an additional 8.5% on top of his Federal and State tax.

[@thevortaz1]

Brilliant. Thanks for sharing James and Spencer.

[@bilo6832]

Roth conversions become even more impactful if one spouse dies early. The survivor loses a standard deduction and must file single.

[@Mugwart1]

I never knew I could set an end date for conversion in the software. Awesome detail to share. Thanks! :)

[@dr.mitchellbrew2656]

Great discussion. Lots of learning here. I would like to understand better the impact of two large pensions that would never put you in a low tax bracket and what to do in a similar situation

[@PH-md8xp]

What about a combined withdrawal strategy, after retirement, withdraw from Traditional IRA AND taxable accounts to start reducing IRA balances so that in the future RMDs don’t push you into higher tax brackets? Roth conversions aren’t the only way to reduce RMDs, there are other strategies that might or might not involve Roth conversions. Seems to me the starting point is, and it’s a bit of crystal ball, is to determine if RMDs are going to be problematic before embarking on trying to mitigate the impact.

[@ssquints8056]

he's not 59.5 yet, therefore pulling from IRA's will trigger a 10% penalty - although he could use IRA money for education without triggering penalties

[@mikej.4416]

Great informative content as always. Thank you for sharing!!!

[@DanF300]

What software was used for this the analysis ?

[@philblane5752]

I've modeled the numbers in the software. The result looks like a scene from the Poseidon Adventure. I have an extremely large 401k and its growing at about 8-12% per year. The RMDs are enormous in the first few years but they're going to quadruple over the next 20 years. I have an 8-year window to try to fix this.

[@derrickyoung1949]

Won’t the tax brackets be adjusted for inflation?

[@poonekar]

I would personally 1031 the properties to 1-2 class A quadplexes in a high cashflow market, hire a good property manager and based on the value of the properties, it can easily generate enough income to almost completely fund the expenses.

[@davedeboy5726]

I cashed out my entire portfolio to pay taxes on it now when I'm 55 so I don't have to pay massive taxes when I'm 75. There's more than one way to beat higher taxes later in life... pay them now.

[@striperkid]

I'm 56 and getting ready to retire in a month or so. I'm planning to go a similar route in order to avoid having to deal with RMD's down the road.

[@laenvirolatina4763]

So important to educate yourself about these strategies to hold on to your hard earned money, thank you Mr. Conole

[@SueTNguyen]

Great video James in modeling my own retirement.

[@learning.finances]

I really enjoyed this case study! I like James how you stated the goal is to manage one's Pretax/Traditional IRAs so they don't get too big or too small. That software is awesome! Is there a way to get a free version? Thanks again for this case study!

[@datbio7302]

So, basically, the trap of RMD is not to overcorrection. Leave enough in the tax deferred account to ride out the tax liability in the later years past RMD ages.

[@bethmcguinn8606]

I did not see any recognition of costs for children at home after retirement. The 10 year old will only be 12. What about college or other school? Food, clothes, other expenses that stop at some point?

[@sdmod1]

Excellent coverage of a wide variety of options for this man !!

[@BiggMo]

Why does a financial advisory business establish itself in one of the worst tax states? (California)

[@scoaste]

If Bitcoin pulls another bull run in 2025 I will consider moving my (low basis) position into a CRUT and selling it; then use the tax deduction to do a backdoor conversion on my entire IRA. Perhaps you could do a video on pros/cons of this strategy?

[@kinggeek1960]

six kids that's a lot of college education costs

[@bvoyelr]

Humble request: I love seeing these real world scenarios (and this presentation in particular), but you will improve these presentations by orders of magnitude if you coach the clients whose consultations you plan to post to limit their nonverbal affirmations -- the "mm hmms" and "yeah"s. They work in conversations, but not in presentations. For one, it interrupts the flow, but the bigger issue is it drowns you out while he's speaking.

[@MyWasteOfTime]

Hmm, can I retire with only millions of dollars......

[@BarbHurley-s6m]

😊

[@eddieloujones2673]

Maybe I'm the only one but it angers me that people like this gobble up housing while we have a housing shortage. I just despise this rental property stuff. Let me buy this so you can pay it off for me. Ugh.