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Money Observations #2: QCDs for those Pesky RMDs
Vanity | 1.2.2020 | Self

Posted on 01/02/2020 6:18:23 AM PST by CptnObvious

Money Observations #2: QCDs for those Pesky RMDs

As of age 70 1/2 now changing to 72, the government requires us to start making Required Minimum Distributions (RMDs) from our tax deferred accounts (401ks, 403bs, etc). In other words, they want those taxes back and with interest (why else would they do such a thing?).

And those RMDs can trigger the nasty Social Security Clawback taxes as well. Makes me angry that they would tax me once again on money I'm not getting fully back, but don't get me started.

So what can be done? Well besides doing Roth Conversions over time. There is another Option for Givers.

Givers are more likely to keep their nest eggs together than not. So it is highly advised that your retirement plan include regular giving to the charity of your choice. Amazingly enough, over 80% of the net worth millionaires Tithe and of those who don't a large majority include charitable giving (see Chris Hogan's "Everyday Millionaires"). Who would have thought it?

So this idea is for Givers and is not financial advice. See your financial and/or tax advisers to see if this might work for you.

-> Use a Qualified Charitable Distribution(s) (QCDs) from your tax deferred account to reduce RMD taxable income. It's that simple.

Let's say, I earn $34000 in taxable dividends and/or Rental income per year. My RMDs are going to be $12,000. This means I have $46,000 in taxable income. But the social security clawback is 85% over $44,000 (married) and I am $2000 over it and I hate paying that tax. Not good.

So what do I do? I direct my IRA provider to send a Check of $3400 (the Tithe on $34,000) instead of from the income. I keep the receipt from the charity to prove I've done a QCD and claim it on my taxes for that year. I get back about $340 dollars and need every dollar to keep the wife happy.

If I do this and Roth IRA conversions (within the lower tax brackets), maybe I can whittle down the RMD problem at last.

Wish I had put more into Roths in the first place, but that's spilt milk.


TOPICS: Miscellaneous
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1 posted on 01/02/2020 6:18:23 AM PST by CptnObvious
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To: CptnObvious

> And those RMDs can trigger the nasty Social Security Clawback taxes as well. <

Please explain what that means. I did a quick Google search, and I found nothing that connected RMDs to any clawback.


2 posted on 01/02/2020 6:27:29 AM PST by Leaning Right (I have already previewed or do not wish to preview this composition.)
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To: Leaning Right

Search “IRS provisional income”

Earn too much from those tax-deferred retirement accounts and they’ll gut your social security. It’s called government red tape. EVEN income earned from tax-free municipal bonds counts as provisional income.


3 posted on 01/02/2020 6:34:18 AM PST by Phinneous (By the way, there are Seven Laws for you too! Noahide.org)
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To: CptnObvious

You’ll have even more fun when you see the new rules for Inherited IRAs.


4 posted on 01/02/2020 6:39:49 AM PST by BobL (I drive a pickup truck to work because it makes me feel like a man.)
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To: Leaning Right

Ping


5 posted on 01/02/2020 6:39:57 AM PST by FtrPilot
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To: CptnObvious

The communists are slowly gnawing on those retirement funds until they get to outright confiscate them all. THAT is their ultimate goal.
They drool over the trillions of dollars of other people’s money just sitting there for the taking while their “corrupt agenda” continuously goes “underfunded”.
The greedy SOBs just cannot stand to see some pour soul amongst the “unwashed masses” that’s worked hard and saved all their life having a little bit of money. Legalized theft is the name of their game.


6 posted on 01/02/2020 6:52:20 AM PST by lgjhn23 (It's easy to be a liberal when one is dumber than a box of rocks...)
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To: Phinneous

Thanks. From what I just read about “provisional income”, it’s not that your Social Security check’s gross amount will be reduced. It’s that you will be paying taxes on more of it.

Is that correct? Is that what the original poster mean by “clawback”?


7 posted on 01/02/2020 6:53:37 AM PST by Leaning Right (I have already previewed or do not wish to preview this composition.)
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To: Leaning Right; CptnObvious; BobL
"Is that correct? Is that what the original poster mean by 'clawback'?"

That is correct. The issue is that social security payments have a sort of tax bracket that's based on your adjusted gross income (AGI). If you're single and collecting SS, if your combined income (which is your AGI + half of SS) is:

less than $25K --- none of your SS is taxed like normal income

between $25K and $34K -- 50% of your SS is taxed

over $35K -- 85% of your SS is taxed

For married filing jointly the 50% begins at $32K and the 85% begins at $44K. (Yet another example of the "marriage penalty" in our taxes.)

The original poster pointed out how he could have avoided more of that with doing more Roth investing. My wife and I invest in Roth 401K's at work (though the company matches go to traditional 401K). When we have extra in our budget we invest in our Roth IRA's. Then when we retire in our mid-50's (using the IRS's "Age 55" rule for withdrawing from 401K's w/o penalty), I'll rollover the traditional 401K money into our Roth IRA's. (Each rollover is itself taxable as though we did a withdrawal from the 401K, so I won't roll it all over in one year. I'll do it in chunks per year to keep up from going into a higher tax bracket each year.) Therefore, during retirement we'll withdraw from our Roth IRA's to live on and have to pay nothing in taxes for it. Later when we start collecting SS in our 60's (assuming there's still such a thing as SS by then), our AGI will be next to nothing. This will mean none of our SS checks will be taxed. Even though we'll be millionaires.

And BobL is right about the change to inherited Roth IRA's. I had planned on my grown "kids" to be able to slowing withdraw from their inherited Roth IRA's using the old RMD calculation to force RMD's spread out over their lifetimes. But the new law change says they have to have their inherited Roth IRA's emptied in 10 years. (That's for non-spouse inherited Roth IRA's.)

8 posted on 01/02/2020 7:38:42 AM PST by Tell It Right (1st Thessalonians 5:21 -- Put everything to the test, hold fast to that which is true.)
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To: Leaning Right
From what I just read about “provisional income”, it’s not that your Social Security check’s gross amount will be reduced. It’s that you will be paying taxes on more of it.

A lot more of it. If you earn over $44000 provisional income then 85% of your Social Security is considered taxable income on to the IRS. Thus if you earn $24000 in Social Security per year, that would be $20,400 considered income to the IRS.

Say you earned $50,000 in provisional income. Then add $20,400 on top of that. That's $70,400. If you and your spouse is over 65, then the Standard Deduction is $27,000.

70400-27000= 42600. The first 19750 is taxed at 10% or $1975. 42600-19750 = $22850 then is taxed at 12% or $2742. So that 85% of your Social Security is taxed at 12%. UGH! Nasty.

9 posted on 01/02/2020 8:05:12 AM PST by CptnObvious (Question her now.)
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To: CptnObvious

The taxman will get you, one way or another. Ugh!


10 posted on 01/02/2020 8:09:44 AM PST by Freee-dame
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To: CptnObvious

CptnObvious wrote: “70400-27000= 42600. The first 19750 is taxed at 10% or $1975. 42600-19750 = $22850 then is taxed at 12% or $2742. So that 85% of your Social Security is taxed at 12%. UGH! Nasty.”

While I hate paying taxes, at least I’ve got enough income to have to pay taxes.


11 posted on 01/02/2020 8:14:55 AM PST by DugwayDuke ("A man hears what he wants to hear and disregards the rest")
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To: Tell It Right
And BobL is right about the change to inherited Roth IRA's. I had planned on my grown "kids" to be able to slowing withdraw from their inherited Roth IRA's using the old RMD calculation to force RMD's spread out over their lifetimes. But the new law change says they have to have their inherited Roth IRA's emptied in 10 years. (That's for non-spouse inherited Roth IRA's.)

That's true, but it won't be taxed. So if they want to pay off their houses with the money, they could in the first year or take the whole thing out - no taxes from what I understand.

It is the Traditional Inherited Non-Spouse IRA that is the Nasty. Yeah, that would be taxed out the bejeebers by them. UGH!

12 posted on 01/02/2020 8:16:25 AM PST by CptnObvious (Question her now.)
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To: DugwayDuke
While I hate paying taxes, at least I’ve got enough income to have to pay taxes.

Yeah, but I like to pay as little as possible legally. I'm going to crack this RMD issue doing both QCDs and Roth Conversions every year until it's solved. No need for the wife to worry over taxes when she's 90.

13 posted on 01/02/2020 8:19:29 AM PST by CptnObvious (Question her now.)
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To: Leaning Right
Is that correct? Is that what the original poster mean by “clawback”?

There's something else to consider, too. If you "earn" too much income, and you are paying for Medicare, for someone single, in 2020, if you earn more than $87,000 (any combination of Social Security, dividends/interest, and even tax exempt interest), you have to pay a higher amount for Medicare Parts B and D. This is called the IRMAA surcharge.

14 posted on 01/02/2020 8:41:48 AM PST by plsvn
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To: Leaning Right

Yes


15 posted on 01/02/2020 8:55:26 AM PST by Phinneous (By the way, there are Seven Laws for you too! Noahide.org)
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To: Leaning Right

Here’s a link that shows how the IRS calculates “combined income” to determine if your social security benefit is going to be taxed.

https://www.ssa.gov/planners/taxes.html


16 posted on 01/02/2020 9:28:48 AM PST by FtrPilot
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To: FtrPilot

Thanks for the link. Now that I have some idea what’s going on here, I can do a bit of planning. Thanks again.


17 posted on 01/02/2020 9:39:29 AM PST by Leaning Right (I have already previewed or do not wish to preview this composition.)
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To: plsvn
This is called the IRMAA surcharge.

A hidden tax that can cost you a lot.

Here's a link that explains IRMAA and how much it can cost:

IRMAA

Anyone on Medicare who's also taking RMDs should read & understand IRMAA.

Also, anyone taking RMDs should do their charitable giving by using a Qualified Charitable Distribution(s) (QCDs) from your tax deferred account to reduce RMD taxable income. This provides a tax break even if you use the standard deduction.

18 posted on 01/02/2020 9:58:03 AM PST by FtrPilot
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To: CptnObvious
Thanks for that info... will look into that. I've lately realized that putting off a Roth IRA rollover was a poor decision.

What will really hurt next year is now that I'm widowed, income will drop about $11,000 but taxes will go up about $4,000. If the QCD trick will reduce the tax hit I may give that a whirl.

19 posted on 01/02/2020 12:44:41 PM PST by ken in texas
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