Required minimum distribution and year end fund distribution

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Kelly
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Required minimum distribution and year end fund distribution

Post by Kelly »

Am I correct in assuming that it's best, if possible, to delay an RMD until after Vanguard makes year end distributions? Specifically, is it smart to wait until the day after the record date? This assumes that the RMD will be reinvested in a stock index.

Are there any other RMD strategies that are useful?

Many thanks for any insight.

Kelly
livesoft
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Re: Required minimum distribution and year end fund distribu

Post by livesoft »

I have an interited IRA of very small value. I take the RMD in January at the beginning of the year to get it out of the way before I forget about it. That way, if I die, then my heirs will not have to worry if I took the RMD or not.
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BL
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Re: Required minimum distribution and year end fund distribu

Post by BL »

There is no benefit that I am aware of.

If you are hoping the QCD for charitable giving will be reinstated each year-end, waiting until December might be a good idea.
Dandy
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Re: Required minimum distribution and year end fund distribu

Post by Dandy »

You are not losing money if you take the RMD before year end distributions. The accumulated distribution amount is reflected in the fund's NAV before the distribution and not in the lower NAV after distribution. So that is not a good reason to wait until the last days of December to trigger your RMD.

There may be some benefit in delaying your RMD to later in the year as most expect our investments to generally appreciate over the long run. So keeping assets invested can result in better asset growth. Of course, some years that strategy will backfire i.e. you will wait and the asset performance will be negative.

I plan to take my RMD in January. I don't want to try to time the RMD to maximize the small possible advantage. If I wait I may forget or get sick and fail to take it. I hate to admit it but eventually I will get more forgetful and the chances of getting sick are more likely too. My spouse is not investment savvy. So, I want the habit to be that we take it early. I don't want her or my heirs to have any fuss with a failure to take RMD.

It is a bit like when you have to pay taxes. Some people would literally wait until the very end to April 15th to mail their check.

I'm sure you could arrange quarterly or monthly RMD payments if that suits your needs/wants.
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midareff
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Re: Required minimum distribution and year end fund distribu

Post by midareff »

Kelly wrote:Am I correct in assuming that it's best, if possible, to delay an RMD until after Vanguard makes year end distributions? Specifically, is it smart to wait until the day after the record date? This assumes that the RMD will be reinvested in a stock index.

Are there any other RMD strategies that are useful?

Many thanks for any insight.

Kelly
Don't know if this is useful or not but here goes.... the downside I see if a bit of book keeping... others may have more downsides. At the prior year's end you know the required RMD for the coming year, in the interest of steadying the cash flow it would seem beneficial to have dividends distributed from the IRA to your bank as they occur with an end of year adjustment made to meet RMD requirements.
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Re: Required minimum distribution and year end fund distribu

Post by cheese_breath »

Is the RMD in the same index fund within the IRA as you plan to use in the taxable account? Assuming we're referring to a stock index fund and stocks usually increase in value more than they lose value it might be beneficial to take the RMD early. Waiting until year end means any gains will be taxed as normal income when eventually withdrawn. Doing the RMD early means they may receive a more favorable qualified dividends treatment. Of course, if you plan on doing QCDs you would want to delay taking that portion until later in the year.
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The Wizard
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Re: Required minimum distribution and year end fund distribu

Post by The Wizard »

RMDs need to be taken prior to doing any Roth conversions in a given year.
So best not to delay RMD too late in the year.
In my case I'm doing regular monthly Roth conversions, so when I start RMDs, I'll take them in the first three weeks of January...
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Munir
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Re: Required minimum distribution and year end fund distribu

Post by Munir »

The biggest advantage to taking the RMD in late December is not having to pay quarterly taxes during the year since they can be withheld by Vanguard at the time of the RMD withdrawal for just a few months until you file your taxes (and hopefully get a refund). For me it has been a relief not having to deal with quarterly taxes.
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Re: Required minimum distribution and year end fund distribu

Post by cheese_breath »

I don’t mind paying quarterly taxes. With two pensions, social security, and RMDs trying to get all the withholdings just right so I don’t go too far over or too far under my total tax liability would be more of a hassle than just doing the quarterly estimated tax payments.
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Re: Required minimum distribution and year end fund distribu

Post by House Blend »

cheese_breath wrote:Is the RMD in the same index fund within the IRA as you plan to use in the taxable account? Assuming we're referring to a stock index fund and stocks usually increase in value more than they lose value it might be beneficial to take the RMD early. Waiting until year end means any gains will be taxed as normal income when eventually withdrawn. Doing the RMD early means they may receive a more favorable qualified dividends treatment.
I think this is a consideration only if tax-deferred growth puts you in danger of jumping into the next tax bracket (a good problem to have), or your RMDs already straddle two brackets.

But if the Feds take (say) 25% of the first and last dollar of every RMD, then doing it early is neutral at best. lf the money is "surplus" to be invested in taxable, you are exposing the money to additional tax drag sooner than necessary.

Regarding the original question...

When withdrawing from a tax-advantaged account, you can be indifferent to dividend dates. Before or after makes no difference other than more time in the market generally means withdrawing a smaller fraction of the account balance.

But the OP also mentions that the she will be using the RMD to buy a stock index in taxable. In that case, I would be willing to delay the withdrawal a couple of days to avoid buying a dividend.
(Edit: This is under the assumption that it is something like bonds in IRA to TSM in taxable.)

If the expected return of the index is 8%/year, that's an expected return of about 2 basis points per 365 days or 3bp for each day that the market is open. On the other hand, if it is a 0.5% quarterly dividend that we are avoiding, and you pay 15% on qualified dividends, that's 7.5 bp in unnecessary taxes--about the same on average as missing 2 or 3 trading days.
(If it is the same fund in both places, you might as well wait as long as it takes. No sense in paying an extra 7.5bp in taxes when they can be avoided in the IRA.)
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Re: Required minimum distribution and year end fund distribu

Post by cheese_breath »

House Blend wrote:
cheese_breath wrote:Is the RMD in the same index fund within the IRA as you plan to use in the taxable account? Assuming we're referring to a stock index fund and stocks usually increase in value more than they lose value it might be beneficial to take the RMD early. Waiting until year end means any gains will be taxed as normal income when eventually withdrawn. Doing the RMD early means they may receive a more favorable qualified dividends treatment.
I think this is a consideration only if tax-deferred growth puts you in danger of jumping into the next tax bracket (a good problem to have), or your RMDs already straddle two brackets.

But if the Feds take (say) 25% of the first and last dollar of every RMD, then doing it early is neutral at best. lf the money is "surplus" to be invested in taxable, you are exposing the money to additional tax drag sooner than necessary....
Let’s say the person is in the 10% or 15% bracket. Every penny taken out of his IRA whether contributions (except after tax contributions), principal growth, or dividends is taxed as normal income whether it’s withdrawn now or later. But once it gets into his taxable stock index fund it will receive more favorable tax treatment. All qualified dividends are taxed at 0% and long term capital gains are taxed at 0% when sold. I would think paying 0% tax is better than paying 10% or 15% tax. Taking the RMD early in the year when the IRA balance is presumable less than later in the year enables the person to enjoy the 0% tax treatment earlier and also results in a lower IRA balance on December 31st, which then produces a lower RMD requirement the next year.
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Gill
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Re: Required minimum distribution and year end fund distribu

Post by Gill »

I don't see any relation between timing of taking the RMD and distributions from Vanguard funds. Others have pointed out various factors to be considered, but these distributions aren't really one of them. I have recently changed from taking it at year end to taking it first thing in the year, after becoming more aware of the problems created if an RMD is not taken before the owner dies or becomes incompetent.
Gill
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Re: Required minimum distribution and year end fund distribu

Post by The Wizard »

Cheese breath makes a good point above.
And even for higher income retirees, paying 15% FIT on investment returns beats paying 28% on RMDs...
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Re: Required minimum distribution and year end fund distribu

Post by Gill »

The Wizard wrote:Cheese breath makes a good point above.
And even for higher income retirees, paying 15% FIT on investment returns beats paying 28% on RMDs...
I guess it makes sense, although there are a lot of assumptions including the bracket of the IRA owner and the fact that it will be reinvested for dividends and capital gain. It probably doesn't apply to many people.
Gill
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Re: Required minimum distribution and year end fund distribu

Post by House Blend »

cheese_breath wrote:
House Blend wrote:
cheese_breath wrote:Is the RMD in the same index fund within the IRA as you plan to use in the taxable account? Assuming we're referring to a stock index fund and stocks usually increase in value more than they lose value it might be beneficial to take the RMD early. Waiting until year end means any gains will be taxed as normal income when eventually withdrawn. Doing the RMD early means they may receive a more favorable qualified dividends treatment.
I think this is a consideration only if tax-deferred growth puts you in danger of jumping into the next tax bracket (a good problem to have), or your RMDs already straddle two brackets.

But if the Feds take (say) 25% of the first and last dollar of every RMD, then doing it early is neutral at best. lf the money is "surplus" to be invested in taxable, you are exposing the money to additional tax drag sooner than necessary....
Let’s say the person is in the 10% or 15% bracket. Every penny taken out of his IRA whether contributions (except after tax contributions), principal growth, or dividends is taxed as normal income whether it’s withdrawn now or later. But once it gets into his taxable stock index fund it will receive more favorable tax treatment. All qualified dividends are taxed at 0% and long term capital gains are taxed at 0% when sold. I would think paying 0% tax is better than paying 10% or 15% tax. Taking the RMD early in the year when the IRA balance is presumable less than later in the year enables the person to enjoy the 0% tax treatment earlier and also results in a lower IRA balance on December 31st, which then produces a lower RMD requirement the next year.
I agree that for someone in the 15% or 10% Fed and 0% state bracket, and expectations of staying there, getting money out of the IRA sooner than later makes sense. (If it goes to a fund like TSM that distributes 100% QDI.) Might as well convert additional amounts to Roth up to the top of that bracket as well.

But it doesn't necessarily produce better after tax results.

Let's take an example: IRA balance last year of $100K. RMD of $5K. The account grows 20% over the course of the year.

1. Take RMD out at the beginning and invest it the same way. You now have $4.25K in taxable (net after tax) that grows 20% tax free to $5.1K. The rest of the IRA grows 20% also, to $114K.

2. Or, take RMD out at the end of the year.
You now have $4.25K in taxable and $115K in the IRA.

Yes, next year's RMD will be larger in the second case, by 0.88%, but you are not in an inferior position. If you wanted to, you could withdraw an extra $1K at the end of the year, and add the extra $850 net after tax to the taxable account, and you are in exactly the same position. Or defer that $1K, and let it count towards next year's 0.88% larger RMD.
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Re: Required minimum distribution and year end fund distribu

Post by cheese_breath »

House Blend wrote:
cheese_breath wrote:
House Blend wrote:
cheese_breath wrote:Is the RMD in the same index fund within the IRA as you plan to use in the taxable account? Assuming we're referring to a stock index fund and stocks usually increase in value more than they lose value it might be beneficial to take the RMD early. Waiting until year end means any gains will be taxed as normal income when eventually withdrawn. Doing the RMD early means they may receive a more favorable qualified dividends treatment.
I think this is a consideration only if tax-deferred growth puts you in danger of jumping into the next tax bracket (a good problem to have), or your RMDs already straddle two brackets.

But if the Feds take (say) 25% of the first and last dollar of every RMD, then doing it early is neutral at best. lf the money is "surplus" to be invested in taxable, you are exposing the money to additional tax drag sooner than necessary....
Let’s say the person is in the 10% or 15% bracket. Every penny taken out of his IRA whether contributions (except after tax contributions), principal growth, or dividends is taxed as normal income whether it’s withdrawn now or later. But once it gets into his taxable stock index fund it will receive more favorable tax treatment. All qualified dividends are taxed at 0% and long term capital gains are taxed at 0% when sold. I would think paying 0% tax is better than paying 10% or 15% tax. Taking the RMD early in the year when the IRA balance is presumable less than later in the year enables the person to enjoy the 0% tax treatment earlier and also results in a lower IRA balance on December 31st, which then produces a lower RMD requirement the next year.
I agree that for someone in the 15% or 10% Fed and 0% state bracket, and expectations of staying there, getting money out of the IRA sooner than later makes sense. (If it goes to a fund like TSM that distributes 100% QDI.) Might as well convert additional amounts to Roth up to the top of that bracket as well.

But it doesn't necessarily produce better after tax results.

Let's take an example: IRA balance last year of $100K. RMD of $5K. The account grows 20% over the course of the year.

1. Take RMD out at the beginning and invest it the same way. You now have $4.25K in taxable (net after tax) that grows 20% tax free to $5.1K. The rest of the IRA grows 20% also, to $114K.

2. Or, take RMD out at the end of the year.
You now have $4.25K in taxable and $115K in the IRA.

Yes, next year's RMD will be larger in the second case, by 0.88%, but you are not in an inferior position. If you wanted to, you could withdraw an extra $1K at the end of the year, and add the extra $850 net after tax to the taxable account, and you are in exactly the same position. Or defer that $1K, and let it count towards next year's 0.88% larger RMD.
OK HB I did an example with a different set of numbers and guess what. You're right... :( (eating humble pie). So what appeared to be so intuitively obvious wasn't. :( (eating more pie).
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Re: Required minimum distribution and year end fund distribu

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cheese_breath: love the user name.
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Re: Required minimum distribution and year end fund distribu

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dc81584 wrote:cheese_breath: love the user name.
I used to call my wife that because she's a big fan of Annette Funicello and the old Mickey Mouse club. But then I decided it's too neat to waste on her and appropriated it for myself.
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Re: Required minimum distribution and year end fund distribu

Post by midareff »

cheese_breath wrote:I don’t mind paying quarterly taxes. With two pensions, social security, and RMDs trying to get all the withholdings just right so I don’t go too far over or too far under my total tax liability would be more of a hassle than just doing the quarterly estimated tax payments.

I don't mind either. At the beginning of the year I do a Turbo Tax forecast based on prior years dividends, pension, SS and whatever else needs to be considered and establish the EFTPS amounts. I do a quick 5 minute review at the end of the year to see if any adjustments to the January quarterly are needed. Easy peasy simple.
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Re: Required minimum distribution and year end fund distribu

Post by Munir »

midareff wrote:
cheese_breath wrote:I don’t mind paying quarterly taxes. With two pensions, social security, and RMDs trying to get all the withholdings just right so I don’t go too far over or too far under my total tax liability would be more of a hassle than just doing the quarterly estimated tax payments.

I don't mind either. At the beginning of the year I do a Turbo Tax forecast based on prior years dividends, pension, SS and whatever else needs to be considered and establish the EFTPS amounts. I do a quick 5 minute review at the end of the year to see if any adjustments to the January quarterly are needed. Easy peasy simple.
I hate writing any checks to the IRS. I prefer that Vanguard withold my total taxes (as determined by my CPA) from my annual December RMD to cover the taxes, which means I never see the money that ends up with the IRS. I usually get back a small refund in March. It is a more satisfying arrangement emotionally and financially.
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Re: Required minimum distribution and year end fund distribu

Post by midareff »

Munir wrote:
midareff wrote:
cheese_breath wrote:I don’t mind paying quarterly taxes. With two pensions, social security, and RMDs trying to get all the withholdings just right so I don’t go too far over or too far under my total tax liability would be more of a hassle than just doing the quarterly estimated tax payments.

I don't mind either. At the beginning of the year I do a Turbo Tax forecast based on prior years dividends, pension, SS and whatever else needs to be considered and establish the EFTPS amounts. I do a quick 5 minute review at the end of the year to see if any adjustments to the January quarterly are needed. Easy peasy simple.
I hate writing any checks to the IRS. I prefer that Vanguard withold my total taxes (as determined by my CPA) from my annual December RMD to cover the taxes, which means I never see the money that ends up with the IRS. I usually get back a small refund in March. It is a more satisfying arrangement emotionally and financially.

We all HATE sending money to the IRS but it is a fact of life for most of us. Look at it as a benefit of having taxable income.
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Re: Required minimum distribution and year end fund distribu

Post by Almost there »

Since it seem more favorable to do the RMD beginning of the year, will VG still withhold the taxes for the IRS?

I will turn 70 in April 2018. So it would be ok to have the RMD done in January 2019 and then the next one January 2020 etc.?

Also if the funds are transferred to i.e. Total Stock VTSAX, won't I have to pay taxes on it again upon removal?

Almost there
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Re: Required minimum distribution and year end fund distribu

Post by sport »

Almost there wrote:Since it seem more favorable to do the RMD beginning of the year, will VG still withhold the taxes for the IRS?

I will turn 70 in April 2018. So it would be ok to have the RMD done in January 2019 and then the next one January 2020 etc.?

Also if the funds are transferred to i.e. Total Stock VTSAX, won't I have to pay taxes on it again upon removal?

Almost there
Vanguard will withhold taxes any time you make a withdrawal if you want them to.
If you turn 70 in 4/18, you are 70.5 in 10/18, so you must take an RMD for 2018. Since that is your first year for RMD, you could wait up until 4/15/19 to take your 2018 RMD. However, you would still need to take your 2019 RMD by 12/31/19. Jan 2020 would be too late. Keep in mind that if your take your 2018 RMD in 2019, you would have two RMDs that year along with the taxes on two RMDs in one year.
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Re: Required minimum distribution and year end fund distribu

Post by Alan S. »

Almost there wrote:Since it seem more favorable to do the RMD beginning of the year, will VG still withhold the taxes for the IRS?

I will turn 70 in April 2018. So it would be ok to have the RMD done in January 2019 and then the next one January 2020 etc.?

Also if the funds are transferred to i.e. Total Stock VTSAX, won't I have to pay taxes on it again upon removal?

Almost there
VG will withhold taxes generally at the rate you elect, but they may have some restrictions on very low withholding rates. Of course, an early RMD means the IRS will have your money 11 months longer than if you did this in December, and you may have a better idea of how much to withhold late in the year than at the beginning. While interest rates are very low, they might be higher by year end meaning an interest free loan to the IRS would cost you more. But if you feel better getting this done early in the year than waiting, do it. In some years you might lose a little and in others gain a little, but it is not a big deal either way.

Your first RMD distribution year is 2018, but you could defer that RMD until as late as 4/1/ 2019 (this option applies ONLY for the year you reach 70.5), but then you would have to take the 2019 RMD by the end of 2019 leaving you two full RMDs taxable in 2019. That may produce a higher total tax bill for the two years.

There is no double tax if you take an in kind distribution of shares. In the taxable brokerage account your cost basis is the value of the shares on the date of distribution, so your cost basis will be equal to the beginning value. The taxation of the RMD is the same whether you transfer shares or distribute cash.
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Re: Required minimum distribution and year end fund distribu

Post by etarini »

midareff wrote:We all HATE sending money to the IRS but it is a fact of life for most of us. Look at it as a benefit of having taxable income.
I like the words of William Bernstein, from his book, Deep Risk (2013):

...I tend to view taxes more as the dues I pay for membership in a club with a billion-person waiting list. :happy

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Re: Required minimum distribution and year end fund distribu

Post by Epsilon Delta »

cheese_breath wrote:Is the RMD in the same index fund within the IRA as you plan to use in the taxable account? Assuming we're referring to a stock index fund and stocks usually increase in value more than they lose value it might be beneficial to take the RMD early. Waiting until year end means any gains will be taxed as normal income when eventually withdrawn.
This is not a complete analysis. You need to consider the rules for paying estimated taxes/withholding. In general if you take an RMD early in the year you can't just invest the entire amount until years end. If the rules were exactly "pay as you go" delaying the RMD would the better course. As the rules are there are a number of small effects that can tip the decision one way or the other, and since the effects can be of similar sizes you need to calculate them all if you want to micro-optimize.

However, for many people just considering the money it's clearcut. Delay the RMD as long as possible and use withholding from the RMD to satisfy the tax payment requirements.
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Re: Required minimum distribution and year end fund distribu

Post by Almost there »

jsl11 wrote:
Vanguard will withhold taxes any time you make a withdrawal if you want them to. If you turn 70 in 4/18, you are 70.5 in 10/18, so you must take an RMD for 2018. Since that is your first year for RMD, you could wait up until 4/15/19 to take your 2018 RMD. However, you would still need to take your 2019 RMD by 12/31/19. Jan 2020 would be too late. Keep in mind that if your take your 2018 RMD in 2019, you would have two RMDs that year along with the taxes on two RMDs in one year.
Thanks for your input. So I will definitely withdraw funds in December 2018.

Thank you, Alan S, for your reply:
There is no double tax if you take an in kind distribution of shares. In the taxable brokerage account your cost basis is the value of the shares on the date of distribution, so your cost basis will be equal to the beginning value. The taxation of the RMD is the same whether you transfer shares or distribute cash.
Sorry, I had to look up the term: "in kind distribution" (every time I think I know everything - I know nothing :confused). However, it was an interesting lesson and hope I understood it correctly: So when I withdraw funds from my IRA account for my RMD, I will then ask VG to transfer it to my taxable account. Then throughout the year, when I need money, I will transfer funds from this taxable account to my checking account.

Almost there
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Re: Required minimum distribution and year end fund distribu

Post by Billyboy »

What am I missing and doing incorrectly, from all angles? I have Vanguard distribute my RMD monthly out of the Vanguard Short Term Bond Index Fund. I've calculated how much in taxes to be withheld for both Fed. (25% bracket) and State (9.3% CA.). Most of what I've read on this particular thread seems to be over my head, which is nothing new.
Occasionally, I either gift any extra money I receive that has accumulated in my checking account or transfer it back to my taxable Vanguard MMF, then reinvest it according to my Asset allocation that I use for that taxable account. The RMD amount I receive is more than I need since both my wife and I are lucky enough to collect Social Security as well as pensions. Last year (2014) was the first year I had to take RMD's and the amount was $78,000.00+, again which I took monthly. This year I'm receiving my RMD's monthly again to the tune of $81,000.00+/ yr.
I glanced over something in this thread about a ROTH IRA. We are both retired with no earned wages. We are not eligible to open Roth IRA's are we?
What am I doing wrong here? Please advise me as to what I'm missing in simple terms.
Any help or guidance any of you can provide, no matter how minute you may think it to be, would be much appreciated.
I need you're help, as you can tell.
Thank you.
Bill
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Re: Required minimum distribution and year end fund distribu

Post by The Wizard »

Bill asks about Roth IRAs in retirement.
Yes, anyone can OPEN a Roth IRA.
But getting $$ into it is a separate issue.
With no earned income, you can't CONTRIBUTE new funds to it.
But you can certainly do Roth CONVERSIONS to it from a tIRA or 401k.
These conversions can only be done after your entire RMD for the year is taken.
And the amount converted is taxable on top of all other income, so you'll want to analyze that...
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Re: Required minimum distribution and year end fund distribu

Post by cheese_breath »

Billyboy wrote:.... I glanced over something in this thread about a ROTH IRA. We are both retired with no earned wages. We are not eligible to open Roth IRA's are we?....
I believe you are, but not the way you think. You can't contribute to a Roth, but you can convert your tIRA to a Roth after you have satisfied your RMD for the year. The RMD can't be converted, but whatever's left in the tIRA can. There used to be MAGI limits on eligibility to do Roth conversions, but they were removed in 2010. I don't know if they were ever reinstated.
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