I have also seen the RMD be posted as MRD or “Minimum Required Distribution”, but regardless, it’s still the same diff. The only thing about it, it should be kept one way so as to avoid confusion.

For instance, just for a couple to reasonably take care of themselves, it may run them about $35,000 on an after tax basis annually. I have seen too many ancestors on both my side and my wife’s side of the family die due to insufficient income to properly take care of themselves. I don’t want us to be in that boat, thus one such reason why I estimate higher.

Let’s say you have a total investable assets of $5 million all in a 401(k) plan or some other pre-tax retirement plan.

This means you start out withdrawing about 4% ($200,000). By age 83, 6% ($300,000) and by age 93, 10% ($500,000). As far as I’m concerned, I don’t like this given a lot of risk factors that can actually cause this money to be depleted much faster, thus why I say a large percent go into ROTH IRAs. As for the example I’ll use, I will just go with the 4% for simplicity purposes.

Let’s assume SSA is nothing again for simplicity purposes. Part of that is cause as time progress, I’m only expecting SSA benefits to be just 50% of what it is today. Not only that, but due to the fixed provisional income limits of $25,000/$34,000, by the time I’m in retirement, I expect 85% of SSA benefits to be taxable income unless the tax codes dealing with these fixed provisional income limits to be changed. All you have to do is look at inflation. As such, for planning purposes, I assume no SSA benefits (Better to be safe than sorry).

One more thing to take into account. The married couple may also have an emergency fund off to the side, which is investable, but also annually taxable. Let’s say they have $300,000 in it and they have taxable income of $20,000 from that fund.

For the year of 2012, a married couple both over the age of 65 will have a standard deduction of $14,800, and personal exemption of $7,600 for the 2 of them. This means they can deduct $22,400 total from AGI. With this $200,000 from the 401(k) plan and the $20,000 from their backup funds, this gives them a taxable income of $197,600. Of course, this is far more income than what they needed to live off of and be able to do other things. It also doesn’t allow for their funds to withstand certain risk factors such as bear market risks or longevity risks.

In the end, this $197,600 taxable income put them into the 28% tax bracket at the federal level and 8.1% tax bracket for the state of Ohio (The state I live in), thus adds up to 36.1% tax bracket. I know it’s not 36.1% going to income taxes, but income taxes for federal and state combined will still work out to be about $55,000

I know those are before tax basis and thus $5 million is not nearly as big of a base as $5 million after tax would be. But if you up the retirement fund and income by 40% to factor in about a 30% income tax factor, then the tax effect is even worse.

Now, let’s assume they have $4 million of that in a ROTH IRA, and $1 million of it in the 401(k) plan. Otherwise, all the same scenario. By the 2% rule, they only withdraw $100,000 from the 401(k) plan and don’t touch their ROTH IRA. They still have the taxable income of 97,600 (120,000-22,400 as the other $20,000 is from their emergency fund still). This put them in the 25% marginal tax rate with a federal and state tax payment of only about $20,000 combined. In this later scenario, they have given themselves additional cushion to account for other risk factors. They have setup the funds in a manner where the RMD does not force them to withdraw more than what the sensible amount would be after having taken these risk factors into account. They have lowered their overall tax bill. In the first example, they would about have had to put about $100,000 of the $200,000 into their annually taxable account, which would be more of a disservice to them given how taxes works.

This goes to show why it’s so important to start the planning process long before you even come close to retirement years.

You should then (even if it’s 2012) take out the RMD due in 2011 in addition, and when filling your return in 2013, indicate the extra RMD was due to the bank’s funds being tied up due to insolvency. The IRS is pretty forgiving when it comes to something like this, completely out of your control.