Retiredguy has several very good points about planning, withdrawals, and investments.
Assuming that the IRA owner is keeping, not donating, the RMD or otherwise tax sheltering the RMD, the important points are
1) RMD is taxed at ordinary income rates.
a) how the IRA portfolio is constructed should generate enough cash to pay the RMD annually from the cash
b) this approach avoids selling portfolio to pay RMD
c) this approach requires rebalancing your portfolio from growth equities to income equities / bonds as you age.
d) assuming 100% invested in SP500 index example, selling the required amount in May each year is acceptable to maintain a constant investment thesis, however, see point 4 below. 100% equity with no re-investable income is a very high risk retirement strategy.
2) Withholding taxes on IRA distributions
a) you get to decide, it can be anywhere between 0% and 100%, your choice.
b) If you select 0% withheld, you can take the entire distribution and reinvest it in a taxable account exactly as in the IRA
c) if 0% withheld, the taxes are paid out of any taxable account you have.
With this approach you should pay estimated taxes quarterly to avoid IRS penalties
d) If you have high medical expenses, take out an equal IRA amount as the deduction offsets the additional taxes
3) Taxes represent a drag on success. If you are successful, you will have a tax applied,
a) success creates other tax effects, which is why all financial analysis alternative comparisons are done on an after tax basis!
b) tax rates can change, so the future is still uncertain, and always will be uncertain.
c) how and from where you pay taxes can be as simple or as complicated as you decide.
d) the closer you are to passing on the IRA to your beneficiaries, the more you should take out of the IRA to pay lower taxes than the working beneficiaries incremental tax rates. They will appreciate you passing your wealth in a taxable account, which has a very high minimum tax threshold.
4) future returns on equity, bonds, real estate, cash, are always uncertain. Sometimes more uncertain than at other times.
a) currently, the future returns are more uncertain than in the recent past 20 years.
b) the investment markets have long term average returns, which must have tax rates applied for after tax returns for compounding models
c) as a retiree, you do not have the long term ahead of you, so returns will become more variable and more precious
d) as a retiree, avoiding asset drawdowns is paramount to maintaining the ability to generate a return/income
These are general guidelines to start applying to a financial model of your income and expenses after one stops working. Not all working stiffs can contribute to a ROTH IRA, we can not. . . so after we stop working, converting to a Roth after losing 25% estimated taxes, requires about 6 years at after inflation 4% return, 8 percent investment return less 4% inflation. however, if you time the withdrawal poorly, the time to get back the taxes paid may be significantly longer, See point 4 above, so using a conservative return and a harsher inflation rate should be used to be realistic. .
good luck in your choices. . .
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