In part three of our series on “Why You Need a Roth” we break down the required minimum distributions (RMD) that Bob and Jane will have.
Now they are 70 years old. Each has $1 million in their deferred accounts. RMD factor for year 1 is you divided that $1 million by 27.4 to get your amount.
Now though, because Bob and Jane decided to go more conservative with their portfolio and only expect a rate of return of 5%, we SUBTRACT this years RMD amount from last years ending balance and times by 1.05 to give us THIS YEARS ending balance.
Then we take that amount, divide by 26.5 which is the RMD requirement and do the same thing.
Next year we take the ending balance divide by 25.6 and so on.
However, when Bob dies and leaves Jane with his IRA, Jane’s RMDs do not change. She will be under the same schedule as previously, because they are the same age, BUT, and this is HUGE, she’ll have MUCH higher income tax to pay.
She is no longer a married filing jointly taxpayer. She is a single taxpayer going forward. And her taxes grow, and grow each and every year even though her income declines significantly.
So, what’s the solution? Stay tuned…