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I recently retired at 57 after 36 years with the same employer. I live pretty frugally and my pension is $90K covers all my normal living expenses.

I have approximately $2M in retirement savings most of which is in taxable 401K or IRA accounts invested relatively aggressively. I don't expect to need to make taxable distributions any time in the near future. I have considered taking a taxable distribution each year to increase my taxable income to just below my next marginal tax bracket and reinvesting that money in a taxable account.

My concern is that if I wait until I am required to take a required minimum distribution at 70+, the account will have grown significantly and the RMD would be taxed at a significantly higher rate. Also concerned the recent tax rate cuts will be gone. Any recommendations on others may deal with this situation?

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    A lot of people would be happy to have such problems... – Aganju Jan 13 at 23:57
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    Well done sir! You should discuss this with your heirs and what they desire. If they are okay with inheriting a large tax advantaged account, then you are okay. Unless you go super crazy with spending, you will leave them a significant amount. Again, great job. – Pete B. Jan 14 at 12:17
  • @Aganju: Yes, I admit my mind boggles a bit at the idea of using "frugally" and "$90K" in the same sentence :-) – jamesqf Jan 14 at 18:14
  • If you have charities (specifically, 501(c)(3)'s) you like, you can give them up to $100k/yr directly from the IRA and it is not taxable but does count for your RMD. (This provision used to be intermittent in some years depending on when and if Congress managed to pass an 'extender' bill, but TCJA made it permanent -- unless Congress decides explicitly to change it.) – dave_thompson_085 Jan 15 at 5:57
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You should consider the option of converting a chunk into a Roth account every year (instead of into a taxable account).

The (small) disadvantage is that it is basically 'stuck' for five years; the advantage is that any further gains are tax-free.

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  • Wouldn't the funds be stuck only if this is the first time OP opens a Roth IRA? "Most of which is in taxable 401(k) or IRA" suggests that some already is in Roth, meaning the five year clock probably already ran out. – Ben Voigt Jan 16 at 17:02
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@Aganju If OP converts to Roth, that money is still taxed. Albeit, the tax rate is based on current tax bracket which may be lower than future bracket and all gains and distributions are tax free in the future. Think that should be mentioned. As @pete-b mentioned, your beneficiaries are likely to receive a large portion and this too should be considered if you want to minimize taxes, regardless of who is paying. If beneficiary is your child, what age/tax bracket/situation are they likely to be when you pass? If their bracket is higher than yours, more money will be paid in taxes. If they are likely to take a lump sum distribution putting them in a higher bracket for the year, more will be paid in taxes. If $2M grows larger than $11M, the lifetime gift cap, the beneficiary will pay taxes regardless if it is Roth or not.1 In conclusion, if either of those scenarios are likely to play out and you plan to maintain your frugal cost of living in retirement, perhaps consider protecting your investments in a Trust.

Inherited 401k tips

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  • The doubling (to $11M+) of the lifetime gift+estate exclusion by TCJA effective 2018 is scheduled to return to $5.5M+ in 2026 -- although one might speculate there will be pressure to change that provision. – dave_thompson_085 Jan 17 at 5:20
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In general, one should be taking one's distributions based not just on one's current tax bracket, but also on what one thinks one's future tax bracket will be. For instance, if someone is currently in the 22% tax bracket, but thinks they'll be in the 12% bracket later, they should not take any distributions now.

In your case, if I understand the formula correctly, you'll have an RMD of around 74k, bumping your income up to 164k (assuming the 90k pension is life-long) for your first year, which is just barely into the 32% bracket. This means, assuming tax brackets stay the same (24% being $85,526 to $163,300), you should bring your distributions up to $163,300. With one additional dollar, you're choosing between paying 32% now or 32% later, so it doesn't matter (if we ignore all the further complications). However, at some point, if you take enough distributions now, your RMD will be low enough that you won't have any income above the $163,300 later.

Another complication is gains in your account. If your account doubles, your RMD will be 148k, making your total income 238k, putting 31k of your income in the 35% bracket. In that case, you'll want to take enough distribution now that your future RMD doesn't put any of your income in the 35% bracket. That is, you may want to take some income now in the 32% bracket to save yourself taking it in the 35% bracket later. How much depends on what you anticipate your account doing.

And then of course there's also the tax brackets themselves. One way for accounting for them is to assume that they'll increase with inflation; it that case, when you look at your expected returns for your account, you should take what you expect the real returns to be to calculate how much you expect to have at 70.

Yet another issue is your filing status. You didn't mention a spouse, so I've been assuming you're filing single. If you're married, or you get married later, that's a further complication.

And as Aganju says, you should look into have the money go into a Roth account.

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