I think that personal financial planning is Ground Zero for FOMO (fear of missing out) for those of us over a certain age. Those of us who need FOMO spelled out. 😊
Everyone’s worries are valid, but many times they are overblown or don’t even apply. But some things we worry about are going to happen anyway (death, taxes), so the better use of energy is to plan for the inevitability and try to make peace with what’s coming.
Here are some common concerns and my quick reaction to them.
“My RMD is going to push me into a much higher tax bracket.”
KS: Maybe higher, unlikely MUCH higher, but paying larger taxes means you have more money, so don’t whine too much.
“I’ll have to withdraw money I don’t need.”
KS: True, but the fact is, you owe the taxes on this money within your lifetime. The system was always set up this way. You knew about it going in and gleefully avoided income taxes for a long time.
“My Social Security will become taxable.”
KS: Plan for the extra tax bill.
“My Medicare premiums will go up.”
KS: Also possible. Keep in mind the IRMAA brackets are different than tax brackets. A married couple would need $218,000 in taxable income to start up the IRMAA premium ladder. And, chances are, you can afford to pay more if your income is that high.
“Tax rates will be much higher when I’m forced to withdraw the money.”
KS: That could happen. If you are very worried, do Roth Conversions now or spend more than required out of your IRA prior to RMDs starting.
“My heirs will inherit a huge tax problem.”
KS: Is it really a problem to inherit money that you pay taxes on? I think not. This isn’t as big a deal as inheriting a family business subject to estate tax with no liquidity to pay it. If you are really concerned, you can:
- Do Roth Conversions if you have taxable money to pay the taxes.
- Gift to your kids during your lifetime and pay the taxes on the distributions yourself.
“I’ll be penalized if I get the calculation wrong.”
KS: This is a legit worry. Financial decision-making gets worse as we age. To avoid this risk, set up automatic calculations and distributions with the company that holds your IRA.
The common thread is that most of these concerns contain a kernel of truth. The better question isn’t whether RMDs can create taxes—they will. It’s whether the additional tax is significant enough in a particular person’s situation to justify doing something about it.
Your friendly neighborhood financial planner can help with ideas to mitigate (we can never totally avoid) the effects of the RMD rules.
