On this episode of The Long View, Cody Garrett and Sean Mullaney, who are both advice-only financial planners and co-authors of a new book called Tax Planning To and Through Early Retirement, talk tax strategies for retirement, why we shouldn’t assume the future of tax rates, and how investors can be tax-smart if they plan to retire early.
Here are a few excerpts from Garrett and Mullaney’s conversation with Morningstar’s Christine Benz and Amy Arnott.
Why We Need to Change the Way We Think About RMDs
Arnott: We often hear people complain about required minimum distributions. They don’t like paying taxes on them, and they worry about the fact that they’re taking money out of their portfolios. But you make the point that the RMD parameters are pretty generous and conservative. Can you talk about that a bit more?
Mullaney: Yeah, and the world has changed here. And I think too many advisors are still singing off the 2017 song sheet. So, let’s think about three big changes when it comes to the taxation of RMDs that have occurred in the last eight years.
The first one is the lower tax rates and the higher standard deduction. These were initially temporary for eight years starting in December of 2017. They’re now permanent. Both those developments are essentially tax cuts on RMDs. The standard deduction is actually a big tax cut. Having a higher standard deduction has this great effect of lowering the tax burden on RMDs the way the tax rules work. So that’s one big change from 2017.
Second big change is the IRS and Treasury, starting in 2022, changed the RMD table. So, most RMDs have been reduced because of this change in the table. I believe it’s roughly 7%. It varies RMD to RMD. But essentially by reducing the amount of each year’s RMD, you’re reducing the highest tax portion of that RMD. So that’s another big change that few have commented on.
And then, the third one is the delay in RMDs. If we were having this conversation eight years ago, we’d be saying, “Well, RMDs start when you turn 70.5.” Well, now, if you are born in the year 1960 or later, meaning you’re 65 or younger as you’re listening to this podcast, maybe 66 if it’s 2026, your RMDs don’t start at 70.5. They start at 75. Congresses have now canceled four or five RMDs, and oh, by the way, the RMDs they canceled are the four or five RMDs most likely to happen by definition.
And you have to step back and say, “Well, wait a minute, how much are these RMDs? Like, what percentage of the account do we have to take out?” At 75, you have to take 4.07% of the account. Is that a safe withdrawal rate for a 75-year-old? I certainly would argue it is. What about at 85? It’s going to be a huge number. Well, it’s 6.25%. Again, is that a safe withdrawal rate? 6.25% for someone who is 85 years old.
So, I think it’s time for practitioners, for retirees, for those thinking about retirement to update our thinking when it comes to these RMDs. They have very much changed since the year 2017. And it turns out they’re not all that onerous, and they don’t require that large of a taxable distribution when they start, which, again, is age 75 for those born in 1960 and later.
Garrett: And I’ll just quickly add to that, for those charitably inclined, at the point that RMDs start, you already have access to those qualified charitable distributions. So, there’s a quick reminder here that, I’ve heard this a lot, that a lot of people assume that—let’s say I have a $300,000 RMD. It’s somehow perceived that you have to spend that money. So, it’s not that you have to spend that money, you simply have to turn that asset into income. You just have to pay ordinary income taxes on that income. But it’s up to you what you want to do with that net distribution. So, the government is not forcing you, they’re not taking the RMD, they’re forcing you to receive it as taxable income—by the way, a lot of people are even saving and investing their RMD along the way for maybe some future inheritance.
When Should You Consider Roth Conversions?
Benz: Yeah, such an important point, Cody. I wanted to ask, and it’s a huge topic, but Roth conversions you’ve touched on a couple of times. Can you share any rules of the road? Maybe talk about life stages when it tends not to be super advantageous to consider Roth conversions as well as when people should lean into them potentially.
Mullaney: Christine, I would start with the pre-Medicare years. These are the years that many early retirees are going to be on an ACA medical insurance plan, and thus the so-called premium tax credit could be a very significant planning consideration. And as we record this in November 2025, this is an area subject to flux. We don’t know what the 2026 parameters on the premium tax credit are going to be. But regardless of that, when we are trying to manage for premium tax credit, we’re essentially subject to two levels of taxation, federal and state income taxation, and reduction in premium tax credit. That functions like an income tax. So, if we’re going to be subject to two levels of income tax in this one and only one part of retirement, that’s not a great time to trigger additional taxable income for most retirees.
So, I would argue that for those retirees thinking about managing for premium tax credit and who have an opportunity to get thousands of dollars annually for premium tax credit, the Roth conversion is probably not an ideal tactic. But let’s go to what we refer to as the golden years—generally speaking, our 66th through 69th birthday years. These four years have some really good attributes. One, we don’t have to manage for premium tax credit. Two, we don’t have to claim Social Security. We can delay that to age 70 and increase the amount annually collected by delaying. And three, we’re not subject to RMDs. So, these four years, the world tends to be our oyster. And during these four years, we have a high standard deduction, and we now have the senior deduction. Now that’s “temporary” for four years. We’ll see if that is really temporary or not. But regardless, these four years tend to be the best, in my view, the best Roth conversion years, because we don’t have required income, we could delay Social Security, we’re not managing for premium tax credit. These are the four years, I think, most retirees should be most thinking about Roth conversions.
Now, let’s play it out to when we turn 70, and now we have to be taking the Social Security or we’re absolutely leaving money on the table. Of course, we’re going to claim it. Now it becomes a lot tougher because that Social Security is filling up the standard deduction, maybe the 10% bracket, maybe even into the 12% bracket. Creating income at that time can also be deleterious because it can increase the amount of Social Security subject to income tax. It can reduce the new senior deduction. So those years, once we start claiming Social Security, I struggle to say that Roth conversions are going to be all that advantageous. And then for those born in 1960 and later, we start taking our RMD at 75. Now I start questioning the need for Roth conversion. Because one thing about RMDs that few comment on is RMDs are a somewhat self-correcting problem. This year’s RMD reduces next year’s RMD to a degree. And so, if we’re already hiving down these retirement accounts and we’re worried about RMDs and we’re taking an RMD, why are we so gung-ho on the Roth conversion post-RMDs when the RMD itself is starting to manage for the future RMD “problem.”