A blessed July 4th to you all! I let another three weeks go by without a new post, drat. I have excuses. Two weekends ago we were driving down to TN to check out progress on the retirement home (roof was about to go on, great progress). Last weekend I flew to Detroit and spent the weekend with our son, driving down to Cincinnati to watch a couple of Braves games. Always have a great time hanging around with Andrew, especially when going to watch Braves games. It was the first time we watched back-to-back games.
I have to tell you we met the nicest people in Cincinnati (actually Covington KY on the other side of the Ohio River and Cincinnati riverfront). We must have had 15 conversations with different combinations of people, and they were as friendly as could be. And Andrew caught a fly ball in left field during batting practice. The seven hours of driving round trip between Detroit and Cincinnati went by in a flash.
Required Minimum Distributions, or RMD. Wow. It sort of just slipped right up on me. For almost 40 years the financial advisors told us to put as much as possible into our 401K or Thrift Savings Plan (TSP), great way to reduce taxes when you’re working, plus pick up on that free match by the company. And they were right. Deep down we knew we would eventually be held accountable for taxes on those funds, but details of exactly how that would happen were rarely discussed. “The tax bite will be so much smaller because your retirement years income will be much lower than your earning years income.” In one ear and out the other.
Keep in mind, I am not a licensed financial advisor or tax consultant, so nothing below this sentence is meant as tax/financial advice.
Most of you reading this (any of you?) haven’t hit 70 years old yet. Up until just recently, 70.5 was that age when the IRS finally started reaching for Uncle Sam’s share of the taxes on your 401K, TSP, or Traditional IRA. Now it’s 72. I guess we should be grateful. About two years ago I started reading about the RMD, but only in the last few months have I realized its tax ramifications. First you might retire with a pension, then you turn on Social Security. If you have a working spouse, you factor in those same contributions to the retirement cash flow. Maybe you add a cash stream from your investment growth. Hopefully this all adds up to a healthy retirement cash flow covering all your living expenses.
Then you hit 72 and the RMD comes into effect- for your 401K, TSP, and Traditional IRA. So exactly how much is that RMD going to be? It’s a fairly complicated formula, but with a little research, you can probably get yourself a pretty good estimate. If these parts of the retirement nest egg are greater than $500K, one might be looking at an annual RMD in excess of $35K. Great for the retirement cash flow, not so great for taxes.
So now I’m looking for options on how to minimize that tax bite which shows up six years from now. I’m going to start with a conversation with my financial advisor, who may refer me to an accountant from TN.
Let’s keep this in perspective. If we’re that worried about taxes, we’re probably doing pretty well cash flow wise in retirement. Not going to lose any sleep over this. But 72 did seem so far out into the future………..