RMD Strategy: After tax return vs lowest taxes

not trying to derail the subject, but what am I missing on Roth Conversions?

I would pay my current tax rate on the gains in the trad IRA now, versus future tax rate on withdrawals. future tax rate will assuredly be much lower than current.

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What may I be missing?

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You probably aren't modeling IRMAA (Income-Related Monthly Adjusted Amount) which is a fee added on top of standard Medicare premiums if your income exceeds annual thresholds.

The usual RMD-lowering strategy is Roth conversions, but there are exceptions depending on your situation.

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would pay my current tax rate on the gains in the trad IRA now, versus future tax rate on withdrawals. future tax rate will assuredly be much lower than current.

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That’s not always the case for many people.

I really like Roth conversions in down markets and/or on beaten up stocks.

Imagine converting 1,000 shares of NVDA when it fell from $30 (split adjusted) in late 2021 to $10ish in 2022. You’d have paid taxes on $10,000 that is now tax free and $170k in your Roth IRA.

Obviously that’s hindsight and a unique example, but even indexes fall 20%+ on a regular basis.

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Must be missing something (eg, wealth transfer)? Enlighten me.

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Wealth transfer can be a big one depending on the size of your account. The 10 year window for non-spousal beneficiaries could put a tax burden on them that doesn’t exist in Roths or with taxable account step-ups.

The other thing many ignore is asset location. You don’t want your highest flying stocks in pre-tax accounts if at all possible. If you’re allocating 30% to growth stocks (just as an example), as much of that as possible should be in Roth and possibly taxable accounts, particularly if you’ll never use the money. That’s not always feasible for everyone, however. For many, their 401k is all they have so they need growth there too.

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RMD strategy

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What do you mean by this?

Unless we have a 100 percent tax rate, growth will always be profitable after-tax

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What do you mean by this? Unless we have a 100 percent tax rate, growth will always be profitable after-tax

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For example only:

No RMD reduction strategy creates $1,000,000 more in tax deferred account
than the Max RMD reduction strategy creates in tax deferred + Roth IRA across the 20+ years to RMD age of 75yo.

However, No RMD strategy creates tax owed of $100,000 vs Max RMD reduction tax owed of $80,000 married filing jointly ($20,000 more).

PV of 20yrs (75yo to 95yo) of $20,000 = $250,000

$1,000,000 increase in total balance > $250,000 PV incremental tax at 75yo.

No RMD strategy tax owed of $120,000 vs Max RMD reduction tax owed of $55,000 filing single ($65,000 more).

PV of 20yrs (75yo to 95yo) of $65,000 = $800,000

$1,000,000 increase in total balance > $800,000 PV incremental tax at 75yo.


If you look just at paying lower taxes
in early retirement years by converting to Roth, are there cases where you are missing total after tax return (in my case I am 20+ years from RMD year…a lot of growth potential) that is greater value than the lowest taxes approach?

That’s where my brain is on this right now.

However, pts made by others above, difference in transferring wealth as tax deferred vs Roth IRA, et al Roth features need to be considered Still learning on this one. Helpful!

Yes with added…

Using retirement lump sum monies parked in tax free asset to live off of for multiple years whole concurrently converting tax deferred to Roth IRA and filling up your target lower tax brackets, in so doing.