Early (in the year) RMD from inherited IRAs

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Crow Hunter
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Early (in the year) RMD from inherited IRAs

Post by Crow Hunter »

I have been thinking and digesting information that others have posted about taking yearly RMD early in the year rather than leaving them and letting them earn more tax free before pulling them out. I see both some pros and cons to this approach.

I have a question about one of the "pros" that I have been mulling about.

I was planning on taking my distribution as an in-kind transfer of Total International Stock into my taxable account.

Would it be prudent to take the RMD now, and thereby setting my cost basis at the current share price, since there is the potential (maybe even likelihood) of further declines in Total International Stock that I could further tax loss harvest this year?

Or would it make more sense to just sit on it until November 'ish and take the RMD then and thereby reset my cost basis to the even lower number should the bloodbath come to pass? If this should not come to pass and it stays the same or goes up wouldn't I be better off since I will avoid dividends and keep more shares in the IRA (should the value go up)?

Right now I am leaning towards option number 2 but does option 1 make more financial sense?

Comments?
RadAudit
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Re: Early (in the year) RMD from inherited IRAs

Post by RadAudit »

This is a bump up; because, I don't know the answer - if there is one.

But while we are in the land of blind leading the blind - the first part of the question (likelihood of Total International Stock declining by year end) is not necessarily a given based on the efficient market theory.

Then there is the question of when, how and how much you are accounting for the payment of taxes on the withdrawal from the inherited IRA. Do you recognize the tax due and place it in a MM for year end? Or do you roll over the entire amount for re-investment?

There are a lot of folks who wait for the year end to take RMDs. Whether they should do that or not is an interesting question based on the direction of the market, dividend rate, etc.

Best of luck crunching the numbers. However, I'd suggest following your IPS.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
RunningRad
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Re: Early (in the year) RMD from inherited IRAs

Post by RunningRad »

I am not an expert, but based on the little that you have presented, I believe that you should seek professional help, as this area is extremely complicated and a false move can be devastating to the tax advantages in these situations.
Few decisions in life motivated by greed ever have happy outcomes--Peter Bernstein, The 60/40 Solution
oldbykur
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Re: Early (in the year) RMD from inherited IRAs

Post by oldbykur »

I divide my RMD into two parts. One part, taken around the end of the year, is used to satisfy my entire estimated federal tax obligation on all income. This is done by having 100% of this part of my RMD withheld for federal taxes. The second part of my RMD is taken early in the year and reinvested in a taxable account for the reasons you mentioned. If the amount reinvested in the taxable account decreases by year end, I harvest the loss. If the amount increases, I have established an opportunity to realize the gain as a long term capital gain.
fposte
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Re: Early (in the year) RMD from inherited IRAs

Post by fposte »

I need the RMD to indirectly fund my 403b/457 contributions, using it to compensate for redirected salary. I therefore take it out in pieces throughout the year. Out of sheer ignorance, I haven't withheld taxes with distributions previously, but I will do so for safety this year. I take it out of stock funds, since I'm pushing up my bond allocation annually, and which stock fund depends on which is pushing most past its allocation.
Bill M
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Re: Early (in the year) RMD from inherited IRAs

Post by Bill M »

I always take my RMDs in mid-December, letting any growth happen in the tax-deferred account. I'm not sure of the argument for taking the RMD early in the year, unless it is needed for spending that year. Is it just a matter of market timing? If you're good at market timing, you should be making your fortune speculating in the futures market, not worrying about timing of RMDs. But when in doubt, good advice is to diversify -- take part of the RMD now and part later.
friar1610
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Re: Early (in the year) RMD from inherited IRAs

Post by friar1610 »

Wow. I didn't do all this analysis when I recently signed up with Vanguard to have them compute and remit my RMDs starting in 2015. I just told them to transfer 25% of it each quarter to my taxable MMF from which I can then make further decisions on what to do with it. My Rollover IRA is almost entirely in Total Bond Market, so I suppose the fluctuations and earnings are not apt to be as dramatic as they would be if more of it were in equities.
Friar1610 | 50-ish/50-ish - a satisficer, not a maximizer
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Watty
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Re: Early (in the year) RMD from inherited IRAs

Post by Watty »

Crow Hunter wrote:Or would it make more sense to just sit on it until November 'ish and take the RMD then and thereby reset my cost basis to the even lower number should the bloodbath come to pass? If this should not come to pass and it stays the same or goes up wouldn't I be better off since I will avoid dividends and keep more shares in the IRA (should the value go up)?
People sometimes suggest leaving the money in the IRA as long as possible to let it grow as much as possible tax differed.

That is fine as long as it actually grows but you can also sort of shoot yourself in the foot if the market declines since you will still have to take the same RMD which will now be a bigger percentage of your remaining portfolio. If you take the RMD in January and it declines you may also be able to take a capital loss and then reinvest the RMD.

This makes the choice less clear cut and if you die before your take the RMD that can be a major headache for your heirs.

You might just split the difference and do it in the middle of the year. :beer
RadAudit
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Re: Early (in the year) RMD from inherited IRAs

Post by RadAudit »

Watty wrote: if you die before your take the RMD that can be a major headache for your heirs.
Thanks for adding another concern to the mix. It's one I've debated with myself and discussed with the DW. I still don't have the correct answer to that one.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
fposte
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Re: Early (in the year) RMD from inherited IRAs

Post by fposte »

Watty wrote:If you take the RMD in January and it declines you may also be able to take a capital loss and then reinvest the RMD.
Can you take a loss from within a tax-deferred account?
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Watty
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Re: Early (in the year) RMD from inherited IRAs

Post by Watty »

fposte wrote:
Watty wrote:If you take the RMD in January and it declines you may also be able to take a capital loss and then reinvest the RMD.
Can you take a loss from within a tax-deferred account?
No,

That could have been phrased better. What I was talking about was if you take a $1,000 RMD and invest it your taxable account in $1,000 of an S&P 500 index fund in January, then it drops to $800 by December then you could sell it, take a $200 capital loss for your tax return, then buy $800 worth of something like a total stock market index fund. You could not just reinvest it right away in the S&P 500 index fund because of the wash sale rules.
fposte
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Re: Early (in the year) RMD from inherited IRAs

Post by fposte »

Watty wrote:
fposte wrote:
Watty wrote:If you take the RMD in January and it declines you may also be able to take a capital loss and then reinvest the RMD.
Can you take a loss from within a tax-deferred account?
No,

That could have been phrased better. What I was talking about was if you take a $1,000 RMD and invest it your taxable account in $1,000 of an S&P 500 index fund in January, then it drops to $800 by December then you could sell it, take a $200 capital loss for your tax return, then buy $800 worth of something like a total stock market index fund. You could not just reinvest it right away in the S&P 500 index fund because of the wash sale rules.
Ah, gotcha--by reinvesting the RMD earlier in the year it gives you the opportunity to harvest losses on that money that you wouldn't have if it had stayed in the IRA. Thanks for explaining.
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