Adulting Part Nine: RMD WTF?
Imagine, your IRS is in the business of determining life expectancy for you.
So, you’ve worked all your life. You have a nice little nest egg (pile of money) you’ve saved. You have a 401K (retirement fund) from where you worked.
Social Security should eventually kick in.
You’re retiring and going to do what you want when you want.
You think your taxes are going to go down because you won’t have much income, you’ll get to keep what you’ve saved.
Let me introduce you to RMD “Required Minimum Distribution”.
The firm that holds your IRA (individual retirement account – your 401K) is going to tell you how much money you have to withdraw each year as a retiree – because your government tells them they have to.
You have no choice.
Starting at age 72. (New legislation has bumped this age to 73 beginning in January 2023, 74 in 2030, and 75 in 2033.)
Yep.
Your government is going to tell you how much of your nest egg you have to withdraw each year based on how much money you have saved and how long they think you’re going to live.
And guess what.
They’re going to tax it too.
Depending on how much you’re required to withdraw, you may get thrown back into a higher tax bracket because of this.
The logic, we’re told, is the money hasn’t ever been taxed before.
It’s true, but in our “earning years” we were told that when we withdrew our retirement savings it would be taxed using the tax bracket determined by income level at the time.
The RMD can potentially change this.
Most of us would never withdraw what the RMD will be, being the thrifty bunch that we are, which should have landed us in one of the lower brackets, or best case scenario, no taxes based on income.
RMD throws that thriftiness out the window.
It’s really kind of ghoulish how it gets calculated too, I get hung up on the “life expectancy factor” (the age to which you're expected to live given your current age) part of the equation.
The life expectancy factor gets pulled from the Internal Revenue Services (IRS - the people who tax you) Uniform Lifetime Table.
Imagine, your IRS is in the business of determining life expectancy for you.
The chart goes up to age 112, so fear not, they relentlessly have their hooks into your money.
No avoiding it, unless of course you run out of money.
From Fidelity:
The formula for calculating an RMD is actually pretty straightforward:
For simplicity's sake, let's assume a hypothetical investor has one IRA with an account balance of $100,000 as of December 31. To calculate the RMD the year they turn 72, they would use a life expectancy factor of 27.4. So the RMD would be $100,000 ÷ 27.4, or $3,649.63.
This is done for every retirement account you have.
This was the Boomers surprise and it affected our parents as well; except they couldn’t have planned for it because they were already retired.
Enacted in 1987, more than likely, some genius realized the Boomers were going to be retiring and their money would be basically, out of circulation so bam, RMD.
Remember, your tax money is a bloated government’s lifeline.
Explore a Roth IRA account.
It’s money you put away in a retirement account that’s already been taxed, so they can’t/shouldn’t be able to tax it again.
Should you need to, at age 59½, you can withdraw both contributions and earnings with no penalty, provided that your Roth IRA has been open for at least five tax years.
But Roth rules are something anyone younger than Boomers should be watching.
You’re government has already written and passed legislation that effects your retirement money:
Biden’s ESG investment rules threaten your retirement savings
Boomers didn’t vote for, RMD trust me it was inflicted on us. It was enacted because our Federal Government is a starving beast that needs to be fed.
Dear Millennials, with us retiring, and there are less of you than us, where is all the money that starving beast needs going to come from?
It’s up to you to watch this aspect of your adult financial life.
UPDATE TO THIS POST 3/13/23
A reader commented that “You've been in congressional power since the early 80s.” Which is incorrect.
We all know, it is Congressional leadership that steers which bills get the green light. Between 1984 and 2023 there have been 2 Boomer speakers of the house, Newt Gingrich and John Boehner. Both Republicans. In Senate leadership there have been 3 Boomers in leadership, Thomas A. Daschle(D) , William H. Frist (R) and Charles (Chuck) E. Schumer (D).
Boomers haven’t had Congressional control as many have been led to believe. It’s Congressional leadership that decides which bills and laws go through the process. Boomers have had 2 Speakers and 3 Senate leaders and three presidents since 1984. The Silent Generation, the Greatest Generation and now Generation X have had a whole lot more control over the Social Security issue than Boomers have.
You can follow the comment and see the factual data where the response was formulated in the comments.
Millennials are mad…
as hell about Social Security not being there for them.
But that anger is misplaced.
We’re (Boomers) not to blame, so quit acting like we are.
The law that created it, The Social Security Act of 1935, was part of Franklin Roosevelt’s(D) New Deal. It was intended “to provide for the general welfare by establishing a system of federal old-age benefits”.
You pay into social security with each paycheck. You’ll see that contribution listed under FICA(Federal Insurance Contributions Act) it’s the federal payroll tax. FICA and Social Security taxes are not the same, but they’re related. FICA refers to the combination of Social Security and Medicare taxes. A total of 7.65% (as of 2023) of your gross wages goes to federal taxes. Your employer matches these percentages:
6.2% to Social Security
1.45% to Medicare
The current cap on taxable earnings is $161,000 a year. When you hit it, you stop paying Social Security tax.
One of the biggest beefs (complaints) Millennials (born 1981-1996) have with us Boomers (born 1946-1964) is that social security won’t be there for them because they are having to pay into a system that’s paying us in retirement. While it’s true Social Security is a pay as you go system, what Millennials seem to forget is that we paid too.
In fact we paid more into the system than we’ll ever collect. It turns out, it was our parents, the Greatest Generation (born 1928-1945) who are one of the biggest causes to the drain. Social Security came into being in 1935, in 1939, there was an amendment to the 1939 law:
The Amendments added two new categories of benefits: payments to the spouse and minor children of a retired worker (so-called dependents benefits) and survivors benefits paid to the family in the event of the premature death of a covered worker.
So if you are a Millennial and had the unfortunate experience of a working parent dying and the other parent (maybe one who never worked or contributed) received Social Security benefits because of it, you have already benifitted from the system we paid into. The same goes for a family member collecting disability.
You’re welcome.
It turns out, the earliest beneficiaries, from back when the program was created in the 1930s, our (Boomer) parents, were actually the ones who received more money than they paid in.
What’s going to be depleted are the Social Security trust funds. There are two trust funds, one for retirees and their survivors, the other for people with disabilities.
Social Security benefits come from two sources: taxes collected from current workers’ paychecks and a trust fund of specially issued U.S. Treasury securities. This trust fund is scheduled to be depleted in 2034, but the system will still collect hundreds of billions in payroll taxes and send out hundreds of billions in benefit checks. If Congress doesn’t intervene, the system can still pay 77% of projected benefits. 3 things millennials are getting wrong about Social Security.
What Are Social Security Trust Funds?
The trust funds made sense when the program was established (1935) and it was intended that funds would build up for a time before being paid out. But because of the 1939 amendment, it was clear, eventually the fund would pay out more than it took in which occurred in 2010.
In 2010, the Social Security Administration began collecting less revenue in taxes than it needs to cover benefit payments, forcing the agency to tap its $2.7 trillion trust fund sooner than some had expected. 10 things Social Security won’t tell you
In 1983, when Baby Boomers had hit their peak earning years, new legislation was crafted as a solution to hopefully prevent this from happening.
the 1983 agreement did succeed in extending the trust fund's solvency for a couple of generations by raising the retirement age to 67 from 65 (to be phased in by 2027); imposing a six-month delay in the cost-of-living adjustment; and requiring government employees to pay into Social Security for the first time. The compromise also cemented a new reigning political consensus on Social Security—Social Security, in historian Sean Wilentz's words, was "untouchable" because it had become more than ever the "'third rail' of national politics. Reagan-O'Neill Social Security Deal in 1983 Showed It Can Be Done.
But now, there is no such demographic bulge like with the Boomers, there is only an ever-diminishing number of workers relative to retirees. And this will continue if Millennials don’t have children of their own and replace the working class who will fund future retirement.
150 million Americans alive today, weren't alive the last time lawmakers on Capitol Hill found a way to work together to improve the program's long-term outlook (1983). That’s 40 years in case you haven’t worked the math. That was Boomers who solved issues with the trust fund for a few generations.
Remember, Social Security benefits come from two sources: taxes collected from current workers’ paychecks and a trust fund of specially issued U.S. Treasury securities.
It’s the trust fund that will be depleted in 2034.
If no changes are made, Social Security recipients will see their benefits cut by at least 20%.
This means Millennials will still receive between 70% to 80% of projected benefits which will come from contemporary workers’ paychecks. That would be the Gen Z (born 1997-2012) workers.
But wait, there’s more. Up to 85% of your Social Security benefits can be taxed by the federal government and in some states a state tax is also applied.
The reason that only seventy to 70% to 80% of projected benefits will be collected is because the trust fund we put in place in 1983 will be depleted, and that’s because your government hasn’t solved that issue, not because we depleted it.
If you're wondering why our elected officials haven't found a way to solve Social Security's imminent cash shortfall for 40 years, look no further than political horse manure.
Prior to 1983, government employees did not pay into Social Security, why should they care?
Post 1983, you’d think government employees would care very much, but it seems they don’t.
Yet, here's what's truly depressing: Lawmakers on Capitol Hill, both Democrats and Republicans, have produced multiple bills that would completely wipe out Social Security's long-term (75-year) budgetary shortfall, but none of these bills has become law. Why, you ask? Each side has produced a proposal that works, and neither side will back down or cooperate with the other party knowing full-well that their proposal eliminates the shortfall. In other words, political hubris* is getting in the way. The Depressing Reason Why Democrats and Republicans Haven't Yet Fixed Social Security.
* Hubris (Overbearing pride or presumption; arrogance.).
So this, together with the RMD, Millennials have some misplaced anger and misplaced energy. They need to be involved with what our government is doing regarding Social Security instead of blaming a whole generation for a shortfall.
In fact, if you observe closely, many of the politicians shepherding modern Social Security issues are older than most Boomers.
Dear Millennial, it is to your advantage to ensure Gen Z (born 1997-2012) keeps working, especially if this current system remains in place.
You are going to retire some day, and if you think about it, and develop a savings plan, over and above what your employer is doing for you, what your government is doing for you, in your twenties and early thirties, it could be fairly easy to be able to retire at fifty-five.
But you have to stay focused on that goal.
Things start to fall apart at age fifty.
I know this for sure…
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Very interesting!
One small nit that boomers aren't to blame. You've been in congressional power since the early 80s. You've held the presidency since 1992...and nothing changed. So as a Millenial (1981, and certainly not this 'triggered' generation idea) I have to say that there's a lot of ability to point fingers, but at a certain point, someone has to do something differently.
What's interesting in looking at the history of the New Deal is just how close we came to becoming a socialist country under FDR. If it hadn't been for our G.I.s seeing socialism up close, I think we would have tipped. The only thing that saved the US from socialism was WWII.
A great book on the topic is New Deal or Raw Deal
https://www.amazon.com/New-Deal-Raw-Economic-Damaged/dp/1416592377