Tax Torpedo – Use Roth or QCD’s to lower RMD’s to avoid it?
A recent retirement planning tool analysis indicates we’d be having SS taxed at 85% 27 out of a 30 year period. Our plan was (is) to designate 100% of our TIRA’s as QCD’s to offset taxes once we begin taking RMD’s in 10 yrs., however, the analysis shows SS would still be subject to the 85% despite these QCD’s. We could change direction and convert large amounts to our Roths, but this would lower the leftover amounts we’d have for QCD’s (no sense paying taxes on money I plan to give directly to charity), AND, we’d forfeit the tax-lowering benefit of the QCD’s. So I’m befuddled to know how we could reduce that 85% SS tax without abandoning our desire to give all of our IRA assets to charities via QCD’s.
If I convert just 50% of our TIRA’s to our Roths, the analysis shows that over a 12 yr period, only half of our annual $200k charitable giving amount ($100k) qualifies as a QCD, and in 8 other yrs, NONE of our giving qualifies as a QCD. So the Roth conversions are effectively wiping out our QCD benefit. In the non-conversion scenarios, ALL of our charitable giving qualifies as QCDs.
Any alternatives, or, is it one or the other?
Permalink Submitted by Alan - IRA critic on Wed, 2021-08-18 18:03
SInce the MAGI thresholds for taxation of SS income are not inflation adjusted, it will be challenging to lower your MAGI enough to escape 85% taxation of all or most of the SS benefit. And of course, high inflation like we have now will accelerate this problem. Being able to even consider reduction of the 85% inclusion suggests that the bulk of your income will be RMDs and SS.
If you have 10 years before RMDs, you might also defer starting your SS benefit and bank the 8% annual delayed retirement credits you receive for each year. You might then have a few years to do incremental Roth conversions which will reduce future RMDs because of the reduced TIRA balance and this will also partially offset the negative tax rate due when the surviving spouse has to file single. You will still have sufficient RMDs left at 72 to offset the taxation with QCDs. This plan would even out your taxable income somewhat over your remaining lifetime. Much of this is dependent on where you stand within your marginal tax bracket. The big jump there is currently where the 12% bracket goes to 22%. Conversion to the top of the 12% bracket may be beneficial depending on where your taxable income stands year to year.
Otherwise, you are correct about the trade offs, but rather than one or the other, the solution might be some of each, timed appropriately.
Permalink Submitted by Blue_Sky on Wed, 2021-08-18 18:33
For point #1 – We have “locked in” deferred salary payouts that go for ten years starting next year, and I hit age 70 in 5.5 years as far as SS is concerned, so I don;t theink we have a lot of flexibility between now and then to reduce our income, and the scenario I put forth already has us claiming at 70 (me) and spouse at 62. If everything is laid out in a spreadsheet by year, what would I look for to confirm that I will still have sufficient RMDs left at 72 to offset the taxation with QCDs, as you mentioned?