RMD Timing

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RMD Timing

Postby pascalwager » Sat Feb 09, 2013 5:29 pm

When moving an RMD from an IRA to a taxable account, are there any timing recommendations to consider (time of year)?
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Re: RMD Timing

Postby Aptenodytes » Sat Feb 09, 2013 5:39 pm

I always do it as late in the year as possible to permit maximum gain in deferred account. I can't think of a benefit to doing it earlier unless you need to spend the money.
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Re: RMD Timing

Postby kaneohe » Sat Feb 09, 2013 5:48 pm

but don't do it so late that it isn't on time (due to processing delays or you get distracted or sick or whatever) and falls into the next yr........
and markets can go down so you might end up withdrawing a fixed dictated amount from a shrunken base...
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Re: RMD Timing

Postby Sidney » Sat Feb 09, 2013 5:56 pm

kaneohe wrote:but don't do it so late that it isn't on time (due to processing delays or you get distracted or sick or whatever) and falls into the next yr........
and markets can go down so you might end up withdrawing a fixed dictated amount from a shrunken base...

Of course, if you aren't going to spend it, it doesn't matter since your position doesn't change if you keep your asset allocation the same.
I always wanted to be a procrastinator.
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Re: RMD Timing

Postby Aptenodytes » Sat Feb 09, 2013 6:03 pm

kaneohe wrote:markets can go down so you might end up withdrawing a fixed dictated amount from a shrunken base...

They go up too, so I just figure that the law of large numbers is my friend. Over the long haul, taking RMDs in December will work out fine. Guessing the best month each year will not work out fine.
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Re: RMD Timing ?

Postby Taylor Larimore » Sat Feb 09, 2013 6:07 pm

pascalwager wrote:When moving an RMD from an IRA to a taxable account, are there any timing recommendations to consider (time of year)?


I agree with kaneohe that it is probably best to do it late in the year to enjoy tax-deferment as long as possible.

Another benefit is that you can use part or all of your RMD for federal withholding. It is easier to figure the amount required near year-end. Using RMDs for withholding often eliminates filing quarterly withholding returns.

I do our RMDs easily using our Vanguard online account.

Best wishes.
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Re: RMD Timing

Postby ddb » Sat Feb 09, 2013 11:03 pm

pascalwager wrote:When moving an RMD from an IRA to a taxable account, are there any timing recommendations to consider (time of year)?


Potential of dying during the year favors taking it as early as possible. If you die without taking RMD, it adds a slight layer of complexity for your heir(s). IMO, this outweighs the marginal benefit of an additional 11 months of tax deferral, particularly in today's low-rate environment and the basis step-up at death.
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Re: RMD Timing

Postby kaneohe » Sat Feb 09, 2013 11:20 pm

ddb wrote:[ and the basis step-up at death.


what does this mean? no basis step-up on retirement plans?
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Re: RMD Timing

Postby chaz » Sun Feb 10, 2013 12:19 am

I take the RMD in late Dec each year.
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Re: RMD Timing

Postby Robert44 » Sun Feb 10, 2013 12:29 am

If you had planned your RMD to be taken out in Dec and you died before then, would the RMD still be need to be taken out. Or could your spouse roll it over to her account and avoid taking the RMD for that year?
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Re: RMD Timing

Postby Watty » Sun Feb 10, 2013 12:32 am

ddb wrote:
pascalwager wrote:When moving an RMD from an IRA to a taxable account, are there any timing recommendations to consider (time of year)?


Potential of dying during the year favors taking it as early as possible. If you die without taking RMD, it adds a slight layer of complexity for your heir(s). IMO, this outweighs the marginal benefit of an additional 11 months of tax deferral, particularly in today's low-rate environment and the basis step-up at death.



Another problem with doing it late in the year is that you might be sick or in the hospital or something and not actually do it. Doing it at least a few months before the end of the year would likely be a better choice than December.
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Re: RMD Timing

Postby BL » Sun Feb 10, 2013 12:50 am

I am starting early this year by partial QCD withdrawal as needed for charity (more than RMD) and then putting that amount (and more) into taxable.

Results for our particular situation as I see it at this point:
non-taxable withdrawals
lower future RMD
will have low or no tax on capital gains and qualified dividend in taxable due to tax bracket
eventual basis step-up for heirs if not used
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Re: RMD Timing

Postby Dale_G » Sun Feb 10, 2013 1:06 am

ddb wrote: Potential of dying during the year favors taking it as early as possible. If you die without taking RMD, it adds a slight layer of complexity for your heir(s). IMO, this outweighs the marginal benefit of an additional 11 months of tax deferral, particularly in today's low-rate environment and the basis step-up at death.


A very interesting point. I have been taking RMD's in mid-December. I have my yearly taxes withheld at that time, but the balance is largely reinvested in my taxable account.

It is the earlier re-investment of the RMD in the taxable account that may lead to the benefit of the stepped-up basis. I'll have to crank up a spreadsheet.

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Re: RMD Timing

Postby pascalwager » Sun Feb 10, 2013 1:57 am

My health is decent, so I'll probably take a chance on early December. I'll probably move the (large cap index) money into a MM and redistribute into TSM and/or TSIM for rebalancing. Is there withholding as part of the transaction?
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Re: RMD Timing

Postby Aptenodytes » Sun Feb 10, 2013 9:26 am

pascalwager wrote:My health is decent, so I'll probably take a chance on early December. I'll probably move the (large cap index) money into a MM and redistribute into TSM and/or TSIM for rebalancing. Is there withholding as part of the transaction?

Usually withholding is voluntary and can be set to whatever level you want. That's how Vanguard does it. As Talyor says, that's another benefit of December. If you have withheld too little, you can use RMD to bump up.
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Re: RMD Timing

Postby ddb » Mon Feb 11, 2013 2:22 pm

Robert44 wrote:If you had planned your RMD to be taken out in Dec and you died before then, would the RMD still be need to be taken out. Or could your spouse roll it over to her account and avoid taking the RMD for that year?


Yes, RMD still required for original account-owner during year of death.

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Re: RMD Timing

Postby troysapp » Tue Feb 12, 2013 1:47 pm

All things being equal, the only thing that matters is your tax rate now versus your future tax rate.

Funds taken from deferred accounts are taxed as ordinary income. In the US, the tax rate on ordinary income has almost always been higher than the tax rate on long term capital gains.

Over time, markets tend to rise. Therefore, for the long term investor it’s generally best to invest earlier in the year than later.

Therefore, it seems to me that waiting to take an RMD will generally cause a greater amount of capital appreciation to eventually be taxed at ordinary income rates. Conversely, if an RMD is taken earlier, then the amount can be reinvested in a taxable account thereby allowing growth to eventually be taxed at lower capital gains rates (and it will also afford greater potential for tax-loss harvesting along the way).

If, however, one is using RMD to make their estimated tax payments (via tax withholding), then waiting may make sense since tax withholdings are assumed by the IRS to be paid equally throughout the year.

Tax estimates can be calculated one of three ways. Those ways are:
1. Based on the previous year’s tax
2. Based on current year actual tax
3. Based on the annualized income method

If a taxpayer is paying tax on the annualized income method, then taking an RMD early will cause inflated required estimated tax payments throughout the year. Very few taxpayers use the annualized income method, however.

A taxpayer that dies during the year must still take that year’s RMD. Additionally, Income in Respect of Descendant (IRD) accounts do not receive a basis step-up upon the death of the account owner. Therefore, estate planning is generally a not really an issue here (except at the extreme margin).

The type of reinvestment (bonds or equities) to be made with the RMD also matters (capital appreciation is generally less of an issue with bonds). Additionally, if the account owner intends to spend his RMD, then taking it later might make the most sense.

We have a different story if one intends to donate their RMD to charity, however. Since markets tend to rise over time, it’s generally preferred to not make the donation until later in the year. This allows the IRD account a higher probability of growth until the set QCD amount is finally distributed. You should also note that QCDs must be paid directly to charity. If one takes an RMD, deposits the amount to their taxable account, and then makes a charitable contribution, you will have increased your AGI which can cause all sorts of tax implications. It’s much better to short-circuit the potential AGI issues by making the QCD directly to charity.

In sum:
1. If going to spend the RMD, then it might be better to wait
2. If using the RMD to satisfy estimated tax payments, then it might be better to wait
3. If investing the RMD in equities, then it’s probably better to take early since long term capital gains are taxed at lower rates than ordinary income AND the high volatility of equities may also afford tax-loss harvesting opportunities
4. If investing the RMD in bonds, then “meh”
5. If using QCD option, then it’s probably better to wait
6. If using the annualized income method for calculating required estimated tax payments, then it depends

Are there any considerations I’ve missed or gotten wrong here?
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Re: RMD Timing

Postby Alan S. » Tue Feb 12, 2013 7:46 pm

Just a couple of minor clarifications:

1) A decedent can no longer complete an incomplete RMD for that year. The RMD of the decedent must be distributed to the beneficiary(s) and is taxable to the beneficiary. Therefore, if the beneficiary is in a higher tax bracket, the RMD of a very elderly or ill IRA owner should be taken early in the year.
2) If a QCD is intended to apply to the RMD, there cannot be an earlier distribution (including a Roth conversion) in that year since the FIRST distribution is deemed to apply to the RMD. Therefore, the QCD should be done first, the rest of the RMD (if any) second, and Roth conversion last. If using IRA distributions for withholding, then the withholding distribution could be done concurrently with the Roth conversion despite the general advice to avoid withholding for a Roth conversion. All these factors combined would be more likely for an individual overweight pre tax retirement assets.
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Re: RMD Timing

Postby Epsilon Delta » Tue Feb 12, 2013 9:22 pm

troysapp wrote:Therefore, it seems to me that waiting to take an RMD will generally cause a greater amount of capital appreciation to eventually be taxed at ordinary income rates. Conversely, if an RMD is taken earlier, then the amount can be reinvested in a taxable account thereby allowing growth to eventually be taxed at lower capital gains rates (and it will also afford greater potential for tax-loss harvesting along the way).

...
3. If investing the RMD in equities, then it’s probably better to take early since long term capital gains are taxed at lower rates than ordinary income AND the high volatility of equities may also afford tax-loss harvesting opportunities
4. If investing the RMD in bonds, then “meh”

Are there any considerations I’ve missed or gotten wrong here?


These are more complicated than that. The key is that taking an early RMD means you need to make estimated tax payments earlier in the year. You have more money invested for longer if you leave the RMD till December, and so earn more. This often than compensates for the extra tax. It's clearly a gain to delay if you invest the RMD in bonds and often a gain if you invest the RMD in stocks.

I suppose the ideal might be to split the RMD in two taking one part late in the year and having 100% withheld to satisfy your withholding tax requirements, and the rest early in the year to take advantage of capital gains tax rates.
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Re: RMD Timing

Postby littlebird » Tue Feb 12, 2013 9:30 pm

[/quote]
Usually withholding is voluntary and can be set to whatever level you want. That's how Vanguard does it. As Talyor says, that's another benefit of December. If you have withheld too little, you can use RMD to bump up.[/quote]

Vanguard told me 10% is the mimimum amount that can be withheld.
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Re: RMD Timing

Postby Dale_G » Tue Feb 12, 2013 9:54 pm

littlebird wrote:Vanguard told me 10% is the mimimum amount that can be withheld.


Yes, but if you have a $1,000 RMD and expect to owe $42 in taxes, you can take a distribution of $958 early in the year. At the end of the year you can take an additional distribution of $42 and have 100% w/h for taxes.

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Re: RMD Timing

Postby troysapp » Wed Feb 13, 2013 1:30 pm

[quote="Epsilon Delta"]
These are more complicated than that. The key is that taking an early RMD means you need to make estimated tax payments earlier in the year.[quote]

This is not true. You can either pay your current year tax estimates based on your previous year's tax OR pay this year's estimated tax based on what your full year tax liability will be. Taking early RMD distributions only affects your tax estimates if you are paying those estimates on the Annualized Income Method.
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Re: RMD Timing

Postby Epsilon Delta » Wed Feb 13, 2013 2:32 pm

troysapp wrote:
Epsilon Delta wrote:These are more complicated than that. The key is that taking an early RMD means you need to make estimated tax payments earlier in the year.


This is not true. You can either pay your current year tax estimates based on your previous year's tax OR pay this year's estimated tax based on what your full year tax liability will be. Taking early RMD distributions only affects your tax estimates if you are paying those estimates on the Annualized Income Method.


As I said its more complicated. If you take your RMD early you need to pay your taxes early (probably using 4 equal installments). If you take your RMD late you can choose to annualize income and pay the bulk of estimated taxes in the 4th quarter*; You don't need to pay them early, although you can choose to do so if you want.

We are talking about timing the payment of an RMD to maximize return. If you are doing that you should also at least consider timing your tax payments to maximize return, which will usually mean using the annualized income method.

* or better, have the withholding taken out of the RMD.
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