It is a good problem in one sense, but if your motivation to save has become more focused on bequests to heirs, RMDs are a drag. We of course understood going in that eventually taxes would have to be paid on tax-deferred accounts. There were no Roth accounts back when we could have inexpensively funded them. So, it’s not only “if we knew then what we know now,” but also “if what we could have used then were available then.”
So, granted that we can take RMDs, not spend the money, and invest the post-tax amounts in a taxable account. But our heirs won’t get the stepped up basis. It won’t matter to charities, as they don’t pay taxes.
There is no stepped up basis on an inherited IRA. And they have to start taking distributions immediately, either all at once as a lump sum, over 5 years, or over their expected life expectancy, and they owe income taxes on it.
You could always take the tax hit and convert to Roth IRAs.
Another issue with the RMD is that, if it pushes you to a higher tax bracket (it likely will for us), then you’ll be paying more in taxes on that money than you might’ve if you’d only withdrawn what you need to live on. We’re trying to convert to Roth or spend down as much as possible before we reach 70.5 (without bumping up our tax bracket)
@notrichenough, yes you’re right, insufficiently caffeinated brain fart. Those of our heirs who are at lower tax rates would benefit from that, but not from stepped up basis.
While I see, in theory, how if I’m willing to pay the tax hit on putting my wife’s contributions into her Roth 401k, I should be equally willing to do Roth conversions, it’s psychologically a bridge too far for me.
Only others thinking about where to live in retirement will appreciate this…
We currently live in MD, which is not considered a tax friendly state for retirees. There are not many “tax friendly” states we will consider moving to during retirement. However, NC is on our potential list (it’s as south as we may be willing to go). I found out recently that due to something called the Bailey agreement (or settlement), it is likely my pension would not be taxed by NC. (It’s either a yes or no depending on how a particular date is calculated, but I’m pretty sure it won’t be taxed). Money I withdraw from my federal TSP account definitely won’t be taxed. This could be worth a lot of money, and its making us seriously consider NC more than we were previously. I don’t think they tax Social security either.
Of course we wouldn’t relocate for just the tax savings, but it certainly helps when we are thinking about where to live.
I’ve looked at that kiplinger article and compared states. What I’m finding is it’s really situation dependent when doing the comparisons. For example, a state may not tax the first $1000 of income, but if you make well over that, it’s not a huge benefit. Or there might not be an income tax, but real estate taxes might be very high.
As 1214mom pointed out, it doesn’t include property taxes in comparing. I live in a low income tax state with very high property tax. Kiplinger ranks it ten most friendly state. I am considering a move to a high income state with negligible property tax. I come out ahead in a high income tax state when everything is considered.
VeryHappy, I agree taxes are only one of many criterion. But there are many choices with low tax alternative. At this stage of my life, I consider taxes are a big factor. It is fixed and you pay year in and year out. The only thing that will override tax consideration for me would be where my kid settles and if I’d like to stay close.
Our property taxes are not that bad compared to many other places… for now. If we don’t consume a lot of taxable goods, sales tax will not matter much (food and medicine are not taxed in my state). But who knows what happens in 15 years.
Seriously, @BunsenBurner? Our taxes in the same state may be the reason we eventually sell and move ;( But I adore my home so DH and I bicker a bit every year at this time as to whether it’s worth it, especially with the McCleary increase.
Lol, if you think WA property taxes are high, move to Texas! We are taxed on the full fair market value (adjusted every year) . Now that DH is 65 part of them will be frozen, which will help.
Not having a state or local income tax should count as about $1000 / year worth of less aggravation and worry on the comparison between states.
