Required Minimum Withdrawls

How does ESPlanner handle retirement account required minimum withdrawls (RMW)? Are these accounted for? If not, how can they be accounted for in ESPlanner?

Comments

Yes, Required Minimum Distributions (RMD) are included in the calculations. Typically, in the reports, you will see roughly level retirement account withdrawals over time that are at least as high as the RMD amounts. On the "Retirement Accounts", "Smooth withdrawals" tab in the program, there is a yellow box which describes this.

Best,
Brian

dan royer's picture

That's right. Another way to put it: if you set smooth withdraws to begin at age 75 (five years past the requirement for at least RMD), then you'd see the RMDs show up from 70-75 after which smooth withdrawals would begin.

I don't see an option for setting the start for smooth withdrawals? I also don't see an option to stop smooth withdrawals "before" retirement age for the conventional method.

dan royer's picture

It's in KEY AGES in Retirement Accounts.

Thanks for comments. Yes, when you set Key Ages to something after 70, you can see that ESPlanner still shows withdrawls even though they were not requested.

I used a MRD calculator available on Fidelity.com to figure out my MRD for 2015 (before deciding to use ESPlanner). Using the same total of all IRAs on 12/31/2014 and expected annual rate of return in both, ESPlanner provides a uniform withdrawal amount until reaching age 100. On the other hand, Fidelity.com (which claims to utilize The Uniform Lifetime Table from the IRS to calculate MRDs) calculates the estimated MRD amount (and the estimated account balance) out to age 115!! As you look further into the future, the consistent amounts found in my ESPlanner report tend to increasingly underestimate the Fidelity figures as a rule. I don't have any financial background to draw upon, so it seems as if this is like comparing apples and oranges at first blush, but what do the IRS expect to see reported? If the IRS expect the amounts in the ULT, then of what use is the amount predicted by ESPlanner? This is not intended to be a criticism, however it's hard to tell what if any consequences could happen by using the ESPlanner results.

The default ESPlanner setting is for "smooth" retirement withdrawals. This ensures that you do meet the required minimum withdrawals or more (which is what the IRS cares about), but is not strictly at the RMD level. Since, by default, you are probably withdrawing more than the RMD in early years, this reduces your retirement assets and thus reduces your future RMD levels. In case it really matters, the IRS formula applies the RMD to each IRA separately, then totals the RMD amounts together.

If you want to experiment, go to Retirement Accounts tab, Key Ages, and set age of first smooth withdrawal to later in life. This should force the program to more closely match RMD's before smooth withdrawals start.

Both ways are fine and, by testing each, you may find one way offers increased standard of living over the other. This is different for each profile.

The reason ESPlanner stops at 100 is because your maximum age of life is set to that age. You can adjust this. The IRS has RMD tables out to 115+. ESPlanner can handle RMDs out to age 110 which is the maximum age of life for the program.

Best,
Brian

My version of your program has a cap on max age = 100. And I think it's the current version. So, what does that mean?

You can set your maximum age of life in the assumptions tab under demographics.

Just in case it's not clear... I'm a user of the program, not an employee.

Best,
Brian

My understanding is that if you fail to withdraw the RMD you are subject to a penalty. I am aware of having received several notifications from this or that savings institution with an IRA of mine regarding the amount to be withdrawn from that account. On the other hand, I totaled my IRAs on 12/31/14 and input that amount into the Fidelity calculator I wrote about, and in addition to inputting my date of birth, used a 3% annual (projected) rate of growth to generate the results out to 115. I contacted Fidelity and they were polite but basically don't allow for downward modifications to the upper limit of the life expectancy of 115. I wrote that Fidelity use The Uniform Lifetime Table from the IRS to calculate MRDs. What I fail to understand was what you meant by altering the ESPlanner key age of first smooth withdrawal to later in life. I took my 1st RMD in '14 but set this age for my current age in '15 in ESPlanner. I suppose it's to raise it to some older age and see what happens in the "Withdrawals" column of the 'Retirement Accounts' section of the PDF. Have your tried this yourself? The other thing that requires clarification in ESPlanner is to do with which quantity to enter in the IRA window. The Fidelity calculator was quite transparent, you entered the amount your IRAs amounted to on 12/31/2014. I've already made my 2015 RMD withdrawal earlier this year. So would I enter the 12/31/14 total, or what it's worth now after having removed the RMD?

Although raising SOL considerations are a priority, my first priority would be to avoiding getting hit with some IRS underpayment penalty because these calculation failed to comport with IRS' expectations.

As described above, ESPlanner's software ensures you withdraw at least the RMD amount or higher. This is true for "smooth" withdrawals, changing "key ages" or any other method so you can be confident that it's covered under all ESPlanner scenarios.

You can find the IRS RMD worksheet here: http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

The worksheet shows the "distribution period" for you at every age from 70 to 115 or higher. From age 115 and up, you have to withdraw a bit over 50% of your remaining IRA assets every year.

Regarding your question about "age of first smooth withdrawal", there are a couple of factors in play. First, the software will always recommend that you withdraw the RMD amount or higher. Second, the program's focus is smoothing your standard of living and not specifically recommending your exact RMD amounts. With that in mind, if you check your tax-sheltered retirement withdrawals today they are probably fairly constant. "Smooth" withdrawals are the default setting.

If you want the program to withdraw at the RMD level for the next 10 years, for example, create a test profile and set the "age of first smooth withdrawal" to 10 years from now. Then look at the reports. You should see the withdrawals closely track your RMD levels given your specific profile and constraints to smooth your living standard. Since each profile is different, there are exceptions, but this should give you a feel for how closely they match up with RMDs. Since ESPlanner's reports are in inflation adjusted (2015) dollars it may not match Fidelity's figures unless they are also inflation adjusted. I have done this myself. In some cases, raising the age of first smooth withdrawals increases your consumption so that's a nice bonus and playing around with this a bit can help you find the age that works best for you.

For 2015, enter your IRA balances as of 12-31-14 if you have them. If not your RMD calcs will be off a bit, but are still probably fairly close. Once you get to 12-31-15, enter those amounts and the 2016 withdrawals will be at the RMD level or higher when you enter 2016.

Best,
Brian

This explanation helps lots....e.g. I advanced the age of 1st smoothing and see what you're saying about how the 'Retirements' columns figures remain constant from that age out to e.g. 100.

Assuming the Fidelity calculator uses the same rate of return (like 3%) the user inputs (into both ESPlanner and their calculator) and the IRS's worksheet, can you explain why the ESPlanner's figures seem to underestimate Fidelity's. You cite inflation adjusted dollars - a concept I'm not acquainted with working with.

Fidelity is probably using "nominal" dollars. That is using 3% (per your number) rate of return every year without accounting for the impact of inflation.

However, after inflation, that 3% won't have as much purchasing power in future years. For example, if you have a 6% rate of return and 3% inflation, your "real" or inflation adjusted dollars grow by around 3% annually in "real" terms (actually 2.913%).

The "real" return is what ESPlanner uses for all figures in the reports. This way you can easily compare if your standard of living in 2015, 2035, etc. are equivalent.

When comparing "nominal" and "real" or inflation adjusted dollars, this is a common reason why the numbers don't match up. There are a couple of posts on the forum with details on converting back and forth between the two.

So...for your specific question, if Fidelity uses 6% (nominal) and ESPlanner uses 2.913% "real" (per my example above), you'll see the difference over time.

Best,
Brian

dan royer's picture

Thanks Brian!

As the least well equipped by way of familiarity (not to mention abiding interest) in grasping the nuances you are talking about (perhaps my attitude will change in future, or not), let me ask you this stupid question, if I use the number/withdrawals appearing in the column of the PDF report (assuming I have entered my 12/31/14 IRA total correctly and the rate of return is in fact 3%) will those deductions agree with the IRS expectations and so avoid my being asked to pay an under withdrawal penalty? I'm just a simple guy and that's really what matters to me at this time.

Since you are on the line for any taxes and/or penalties, I'd use the IRS RMD worksheet that I linked to above as your definitive source. Repeat this every year using your year end IRA balances.

The ESPlanner recommendations should be fine for the current year. Once you move to future years, the nominal/real conversion issues described above must be taken into consideration.

Best,
Brian

I have found that the current (2015) and 2016 withdrawals are tack on wrt the Fidelity calculator's result; their calculator utilizing the IRS table per their website's description.

If I seem to the be only person who has picked up on this discrepancy, does that mean others would be relying upon a single report which they put away someplace and refer themselves to when it comes time to make an IRA withdrawal every year. Based on our interactions that doesn't seem like that would be a good idea.

Precision counts when it comes down to specifically filing taxes, making RMD withdrawals, etc. When you file your taxes, most of us probably use a tax program or professional and you should be just as careful each year with RMDs. Updating your IRA/401k assets each year with your year end values will lead to accurate RMD results in the reports.

Fortunately, there are a number of users reviewing ESPlanner's results for their specific situations along with the team carefully programming and testing to ensure accuracy. Also, posting this on the forum should help others as well.

Good luck!
Brian

If time permitted, I think it would be really personally quite instructive (and perhaps to any others 'out there' with as little savoire faire in matters having to do with financial planning and/or economics) to see a side by side comparison contrasting the results of utilizing a fixed IRA valuation as of e.g. 12/31/14, current age (e.g. seventy something), fixed assumed rate of return on the IRAs which demonstrated the utility of removing the "Withdrawals" amount yearly via ESPlanner and the IRS' tables (the latter which I'm assuming are the determiners of whether you are penalized or not). After giving this an extra moment of thinking, perhaps there is no way to do this since the IRS calculations use an upper age of 115?

If what you are suggesting is that as each December 31st rolls around and a newly updated IRA amount is available, to use this amount in the ESPlanner for planning purposes, then is the "Withdrawals" amount simply to give a fuzzy estimate of what to expect in future years?

If I may, you are trying to solve a problem that's not really a problem.

Each person's situation is different and will change over time given their contributions, withdrawals, Roth conversions, actual rate of return, taxes, the rest of their profile, etc.

The simplest way to do what you want is to set your age of smooth withdrawals to very late in life. This will produce a report with RMDs recommended for withdrawals (with exceptions based on specific profiles noted above) in "real" or inflation adjusted dollars. By converting these figures to "nominal" dollars you'll get what you want. A spreadsheet can do this quickly and you can find the nominal/real conversion formula on this forum or the web.

The issue is that real life won't follow your model precisely. So...you still should use the IRS table (guided by ESPlanner's reports) for your current year to ensure your withdrawals are fine. If you don't want to take the IRS step, then you can just use ESPlanner's recommendations for the current year given your IRA amounts are correct for the previous end of year.

Since the future is uncertain and will not match your profile 100%, our models need to be updated over time as events occur. What's "fuzzy" in 2015 will be somewhat clearer as we move to 2016, 2017, and beyond.

Best,
Brian

dan royer's picture

Thanks Brian. I might add too . . . and I'm not sure about this, but in another post, perhaps it was a support ticket post, you mentioned just simply making sure you have enough to live on etc. There may be no reason at all to use RMD. Just set a conservative rate of return on your retirement assets and set smooth withdrawals from now through age 100, and withdraw the amount recommended. I suppose there are reasons in some cases to use RMD, but I'm not sure what those would be myself. If I didn't want to spend all of my money, I'd just create some estate amount in the Estate folder or I'd assign myself some special expense later in life. I may be naive, but I've never understood under what conditions one would want to use RMD anyway. I might use Special Withdraws for a few years, but why use RMD in the first place? You don't have to answer that here, but just make sure the answer is clear in your mind.

Hi Dan,

Depending on the profile, you may find that only taking RMDs is more tax efficient which can increase consumption a bit. The specific years can also make a difference. One spouse may benefit while another may not as well.

Of course, for other profiles this is a negative so it helps to experiment to see what works for each unique situation.

Best,
Brian

Can I elect to add the 'upside' investing feature to my regular edition?

dan royer's picture

You'd have to purchase PLUS to get to the upside investing. Are you sure you need to do that?

Please clarify.

dan royer's picture

If you own ESPlanner and you attempt to purchase ESPlannerPLUS (which includes Upside investing), then it will ring up at $100. ($50 for another 365 added to expiration and $50 for the difference in price of the two programs).

I guess before purchasing things I ask myself if it's something I need. It seems you've put a lot of attention and time into economics based planning and seem to be figuring that out--I just meant to indicate that purchasing Upside would put you on a new learning curve with a new method of planning. I don't use it myself, but some people find it interesting.

Okay that's clearer now. Thank you.

Can ESPlanner account for Inherited IRA RMD's? I'm 50 and retired, and need to take RMD's every year from this inherited IRA to satisfy the IRS. My other standard IRA, I won't take RMD's until age 70.

And further info for above: By selecting an investment return of my choice, I currently use a Schwab calculator to figure out what my expected Inherited IRA RMD's will be for each year into the future. I then convert each of those figures into today's dollars (accounting for inflation), and then manually input to ESPlanner as "special withdrawals" under the "retirement" tab. That can be a lot of work to update over the years. I'm hoping ESPlanner has a way to do this automatically. Thank you!

dan royer's picture

It does not figure the RMD for you until age 70. At that point it will force RMD if you have age of first withdraw set after age 70. You can, however, use other methods of periodic equal withdraws to satisfy the early withdraw rules. See rule t76 early withdrawals.

This doesn't seem to be working as I expected. If I configure a special individual deductible withdrawal for an inherited IRA (as per bcraig99 above) on a schedule that goes beyond age 65, it no longer calculates and includes the normal personal IRA RMD until the special withdrawal scheduled elapses. Is this expected? I was thinking that this special withdrawals were in addition to the normal RMD schedule. It looks like it is instead THE actual withdrawal schedule for the years specified.

Yes, special withdrawals are the actual withdrawal, assuming they are high enough to ensure RMDs are accounted for. Here is a quote from another forum post which describes this:

"ESPlanner takes withdrawals from Regular Assets until these conditions are met for retirement accounts: (1) withdrawals necessary to meet Required Minimum Distributions after age 70, (2) Special Withdrawals, (3) Smooth Withdrawals, and (4) as necessary to meet your standard of living if there are no Regular Assets available."

Best,
Brian

That does seem to complicate things then, because I am guessing that since it has comingled the Inherited IRA and my Traditional IRA accounts, it doesn't recognize that the RMD for Traditional IRA is distinct (and lower) than a single RMD for the combined amount. In effect, I have an IIRA with its required RMD and a TIRA with its separate RMD, but I think it is being view as a single pot of combined retirement account money. It sounds like I would have to manually do the RMD calculations for both and then set that as the withdrawal amount? Is there a better way to model this? Currently, I have my TIRA entered in the Retirement/Assets/IRA section and the IIRA in the Retirement/Assets/Supplemental Retirement Accounts.

I think you are right about this. You could do side calculations and input a series of inflation adjusted special receipts for the IIRA to account for the RMDs. You'd have to take the IIRA assets out of the retirement assets tab so it wouldn't fully show your net worth, but that shouldn't be a major issue.

If the IIRA is a small fraction of your total, the effect shouldn't be too large in either method. If the IIRA is a much higher percentage, I'd probably use the special receipt method.

Best,
Brian

Ok thanks. I'm new to this in general, so do the special receipts just serve as an income stream that is not tied to any existing pot of money that is entered elsewhere? Also, do I enter these each year in today's dollars or do they need to account for inflation? I sense that all entries are always in today's dollars.

You have the special receipts right. You can enter either today's dollars or accounting for inflation. Either way works and is up to you.

I haven't looked at the IIRA RMDs so don't know the exact schedule, but do have this for traditional IRAs. To give an example, I'll pretend they are identical:

Assume $100K IIRA as of Dec. 31 of previous year, age 70, 3% inflation, 6% rate of return (or 2.913% real rate of return if you want to use inflation adjusted dollars).

In year 1, the $100K increases by $2,913, then decreases from RMD of $3,650. So you end year 1 with ~$99,263.

In ESPlanner, keep the $100K out of the program, but include $3,650 for special receipt for year 1 (assumed to be taxable at ordinary rates). Repeat for future years. There are some rounding errors here, but it should be close enough.

Again, if the IIRA isn't a large percentage of your assets, you may be "close enough" just using the normal method that you are already using. This way you don't have to go through side calculations each year and update special receipts. At a certain point, you have to decide how much benefit the extra effort is providing and is it worth it.

Best,
Brian

Ok - that makes sense. That's what I was already doing when I was using the Special Withdrawal schedule. It sounds like I can just move this over to the special receipts section. I just wasn't sure if the yearly numbers I entered should be today's dollars or not. Thanks. It would be nice in the future if ESPlanner could handle Inherited IRAs (as well as the post-tax basis in traditional IRAs).

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