Reinvesting RMDs

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my name
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Reinvesting RMDs

Post by my name » Sat Feb 17, 2018 12:21 pm

I am thinking of having one RMD withdrawal. It will be at end of year. I will reinvest the amount. So this will be Total Stock Market (deferred) to Total Stock Market (taxable).

Questions -

1. Should I time this to happen just after the December distribution for the purchase in the taxable account to avoid year end distributions and that tax? I'm not sure Vangaurd's auto RMD withdrawal is that flexible.

2. Is there any problem by selling a fund (deferred), then buying the same fund right away (taxable)? I read about wash sales, but this seems to involve how loss is treated?

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ruralavalon
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Re: Reinvesting RMDs

Post by ruralavalon » Sat Feb 17, 2018 12:42 pm

my name wrote:
Sat Feb 17, 2018 12:21 pm
I am thinking of having one RMD withdrawal. It will be at end of year. I will reinvest the amount. So this will be Total Stock Market (deferred) to Total Stock Market (taxable).

Questions -

1. Should I time this to happen just after the December distribution for the purchase in the taxable account to avoid year end distributions and that tax? I'm not sure Vangaurd's auto RMD withdrawal is that flexible.
I believe you can specify any date you wish for the Required Minimum Distribution. Call Vanguard and ask.

If you can pick any date you want, then just pick a November date.

my name wrote:2. Is there any problem by selling a fund (deferred), then buying the same fund right away (taxable)? I read about wash sales, but this seems to involve how loss is treated?
Since you are selling from a tax-advantaged account, you are not tax loss harvesting, and I don't see how the wash sale rule could come into play.
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BL
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Re: Reinvesting RMDs

Post by BL » Sat Feb 17, 2018 12:47 pm

I would not wait that long for required withdrawals.

I might even do it very early so later gains are CG, not ordinary income gains. I suppose there could be an argument the other way as well.

No tax loss claimed, so no wash sale.

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Post by sport » Sat Feb 17, 2018 1:01 pm

If you make only one withdrawal, you are not making any Qualified Charitable Distributions (QCDs). If you make any charitable donations, using QCDs will reduce your federal taxes and possibly your state tax income taxes if there are any. You must be older than 70.5 to do this. What I do is make QCDs at various times during the year. Then, in November, I withdraw the balance of the RMD.

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Re: Reinvesting RMDs

Post by Kevin M » Sat Feb 17, 2018 1:54 pm

BL wrote:
Sat Feb 17, 2018 12:47 pm
I might even do it very early so later gains are CG, not ordinary income gains. I suppose there could be an argument the other way as well.
I think an argument to take the withdrawal later is based on the concept that you only own part of your IRA (the government owns the other part), and the part you own is tax free. If you will pay 25% tax on your distributions, then you really only own 75% of the IRA. Your 75% grows (or falls) tax free, and the government's 25% share grows or falls, and then is used to pay the taxes.

If the stock value increases by the distribution date, then you have tax-free growth instead of having paid taxes on the dividends and having unrealized capital gains. Of course if you are in the 12% or lower tax bracket, then your qualified dividends and LTCG are tax-free in a taxable account, in which case it may not matter which way you do it.

If the stock value decreases by the distribution date, then you won't be able to tax-loss harvest to use the loss to offset gains or to reduce ordinary income by up to $3,000. However, if you take the distribution just before year end, then your RMD for the following year will be smaller, which you could view as a benefit that somewhat offsets not getting the tax loss if it were in a taxable account. If you are in the 12% bracket or lower, then the tax loss is not beneficial in offsetting gains, but it still is beneficial in being able to offset up to $3K of ordinary income.

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Re: Reinvesting RMDs

Post by carolinaman » Sun Feb 18, 2018 8:07 am

RMDs can be part of your overall tax strategy. For that reason, I prefer to do RMDs late in the year when my tax situation is clearer. I do QCDs and also determine how much withholding for Fed and St taxes so I can avoid an under withholding penalty.

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Re: Reinvesting RMDs

Post by BL » Sun Feb 18, 2018 9:12 am

I tend to agree that is a valid argument. Have just been doing QCDs so haven't thought it through as carefully as I might have. We do spread that over the year as needed, but it is always a relief to have the RMD amount taken care of in case life emergencies happen and we might forget to do it. We are trying to use it up by taking out larger amounts, but the stock market has not let us; it just keeps on replenishing it! I know that could change quickly.

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Re: Reinvesting RMDs

Post by dbr » Sun Feb 18, 2018 10:08 am

Kevin M wrote:
Sat Feb 17, 2018 1:54 pm

I think an argument to take the withdrawal later is based on the concept that you only own part of your IRA (the government owns the other part), and the part you own is tax free. If you will pay 25% tax on your distributions, then you really only own 75% of the IRA. Your 75% grows (or falls) tax free, and the government's 25% share grows or falls, and then is used to pay the taxes.
Why do people go through this bizarre charade about who owns what rather than just do the calculations to show what does or doesn't benefit the investor? Do people think that actual math is wrong but a weird argument proves that it is right? There is no place anywhere on the books of the United States Government where owning part of anyone's or everyone's tax deferred investments is tabulated as an asset "owned" by the Government. Anyway, it is not even an argument in the first place; it is simply advice to do what is already known, which is to leave tax deferred assets to grow as long as possible. Otherwise, we would advise people to cash in their IRAs as soon as possible or even never invest in them in the first place. Actually, sometimes we do advise cashing in the IRA as soon as possible as in convert to a Roth IRA when taxes are down or never investing in a TIRA in the first place but rather a Roth or even a taxable investment that will get basis step up later.

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Re: Reinvesting RMDs

Post by celia » Sun Feb 18, 2018 10:37 am

If you're going to sell, that part will no longer get the distribution, so you can then move cash. Then you can buy in taxable after the distribution date. But then you'll likely get different buy and sell prices.

Or you can take the RMD in-kind, meaning transferring shares from tax-deferred to taxable without selling. But if you do this, and you are transferring stock or EFTs, you have to take whole number of shares by sending/faxing in a form and it could take longer than you expected and the share price would keep changing. Don't wait until the last minute.

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Re: Reinvesting RMDs

Post by Kevin M » Sun Feb 18, 2018 1:06 pm

dbr wrote:
Sun Feb 18, 2018 10:08 am
Kevin M wrote:
Sat Feb 17, 2018 1:54 pm
I think an argument to take the withdrawal later is based on the concept that you only own part of your IRA (the government owns the other part), and the part you own is tax free. If you will pay 25% tax on your distributions, then you really only own 75% of the IRA. Your 75% grows (or falls) tax free, and the government's 25% share grows or falls, and then is used to pay the taxes.
Why do people go through this bizarre charade about who owns what rather than just do the calculations to show what does or doesn't benefit the investor?
I think the reason some people find the my-share/government-share mental model useful is that it can help simplify decisions like the OP is pondering given certain assumptions (like a constant tax rate), and help avoid errors in thinking. For example, I think it's an error to think that by taking the distribution early you convert gains from ordinary income to long-term capital gains in a way that is beneficial to you, as one poster mentioned. This error in thinking is easily avoided by using the my-share/their-share model, and realizing that any growth on my share is tax free. But let's go ahead and do the math to demonstrate this particular point.

Assume an initial value of $10,000, growth of 10%, a constant ordinary income tax rate of 22%, and LTCG tax rate of 15%. With the my-share/their-share model, I don't have to do any math to know that I'd rather have tax-free growth on my 78% share than pay 15% tax on the growth of my 78% share. Here's the math using different models.

With my-share/their-share, my share is $7,800, (78% * 10,000) on which I get a tax-free gain of $780 (10% * 7,800) if I hold off on taking the RMD.

Doing the math the conventional way, the tax-deferred growth on $10,000 is $1,000 (10% * 10,000), on which I pay tax of $220 (22% * 1,000), leaving me with $780. Same result--just a different way of calculating it.

If I take the RMD before the growth, I start with $7,800 in a taxable account ( (1-22%) * 10,000 ), I have $780 in growth (10% * 7,800), on which I pay 15% in taxes, leaving me with $663 after tax ( (1 - 15%) * 780). Since $663 is less than $780, there was no benefit in "converting ordinary income to capital gains".

I don't mind doing the math, but with the my-share/their-share model, I don't need to do any math to know that it's an error to think that you convert ordinary income to capital gain income in some way that's beneficial.

Of course the assumptions are important. For example, if your tax rate at the beginning and end of the period are not the same, then you might need to do the math to determine which might be more beneficial. And of course possibilities like your heirs getting a stepped-up basis if you die before selling the stock or taking the RMD also impact the decision.

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Re: Reinvesting RMDs

Post by dbr » Sun Feb 18, 2018 1:46 pm

The reasoning is circular. You can't use a my share/their share to do the math until you have done the math to establish that my/their is a valid model. If people want to use it as a mnemonic to remember how it comes out, I guess there is nothing terrible about that, but it is a result and not a premise from which one can reason a conclusion because there is not in fact any algorithm in tax law that begins with a government claim on what the government "owns" and what the taxpayer "owns."

An aside on the topic of income tax is the way this works out in property tax. Since property tax is assessed on the value of the holding in perpetuity it would come out that the same reasoning says the government owns an infinite multiple of the value of your property. Yet ownership of private property is one of the sacred tenets of our system of government. Is this an argument that property tax is a confiscatory tax (moderator lock?).

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Re: Reinvesting RMDs

Post by Kevin M » Sun Feb 18, 2018 2:49 pm

dbr wrote:
Sun Feb 18, 2018 1:46 pm
The reasoning is circular. You can't use a my share/their share to do the math until you have done the math to establish that my/their is a valid model.
Sure, but once you've done the math to convince yourself of the validity of the model in general, you don't have to do it again for each specific case, rather than use the model as a shortcut to simplify thinking about certain financial decisions.
If people want to use it as a mnemonic to remember how it comes out, I guess there is nothing terrible about that, but it is a result and not a premise from which one can reason a conclusion because there is not in fact any algorithm in tax law that begins with a government claim on what the government "owns" and what the taxpayer "owns."
Yes, it is not something to be taken literally, but just to be used as a mental model to simplify thinking about certain decisions. I often prefer to think in terms of risk-sharing rather than ownership-sharing, as the ownership sharing model confuses people when thinking about taxable accounts. This is an important distinction when considering the impact of taxes on asset allocation.

For example, if the basis of a taxable asset is equal to its value (say the day you buy it), then the government ownership share (in the mental model, not literally) is 0%, but the government risk share is equal to the tax rate you'd pay on gains (or the tax loss rate you'd take on losses); let's say 15% assuming long-term capital gains tax on stocks. People who agree with tax-adjusting asset allocation, but think only in terms of the ownership model, would say that in a tax-deferred account with an assumed constant tax rate of 22%, you should count only 78% of the assets in your AA, but in the taxable account you should count 100% of the assets in your AA.

In the risk-sharing model, which I think is more relevant to asset-allocation decisions, I'd say you should count only 85% of the stocks in your taxable account toward your AA, since AA decisions are more about after-tax risk/return tradeoffs than about the after-tax value of your current holdings. After taxes, you will gain or lose only 85% of the change in value, so from a risk perspective, your risk is less than if you held the stocks in a Roth, for example, and the government does not share in your gains or losses.

I think the risk-sharing model helps simplify and clarify decisions about asset allocation and asset location. I'm tempted to give an example of what I think is one of the most widespread erroneous views about asset location because of a lack of understanding about after-tax risk/return compared to before-tax risk/return, but we're already getting pretty far off topic.
An aside on the topic of income tax is the way this works out in property tax. Since property tax is assessed on the value of the holding in perpetuity it would come out that the same reasoning says the government owns an infinite multiple of the value of your property. Yet ownership of private property is one of the sacred tenets of our system of government. Is this an argument that property tax is a confiscatory tax (moderator lock?).
The question I'd ask here is does this lead to some mental model that simplifies financial decision making in any way?

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Re: Reinvesting RMDs

Post by radiowave » Sun Feb 18, 2018 3:57 pm

celia wrote:
Sun Feb 18, 2018 10:37 am
. . .

Or you can take the RMD in-kind, meaning transferring shares from tax-deferred to taxable without selling. But if you do this, and you are transferring stock or EFTs, you have to take whole number of shares by sending/faxing in a form and it could take longer than you expected and the share price would keep changing. Don't wait until the last minute.
celia, do you know which brokers allow direct transfer of funds from tax-deferred to a taxble account? I asked a Fidelity rep on the phone a few months ago about a Traditional IRA to Roth IRA in-kind transfer and he said it wasn't possible at that time but seemed to hint it would be in the future.

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Re: Reinvesting RMDs

Post by celia » Mon Feb 19, 2018 2:52 am

radiowave wrote:
Sun Feb 18, 2018 3:57 pm
celia, do you know which brokers allow direct transfer of funds from tax-deferred to a taxble account? I asked a Fidelity rep on the phone a few months ago about a Traditional IRA to Roth IRA in-kind transfer and he said it wasn't possible at that time but seemed to hint it would be in the future.
Transferring from a tax-deferred account to a Roth is called a Roth conversion, which is a taxable event that can no longer be un-done, should you change your mind or find that you can't afford the increased taxes.
How to Convert at Vanguard.

I only know about Vanguard and have transferred mutual funds shares from tax-deferred to taxable and done Roth conversions online. I am still on the old platform so don't know if this is also true on the new (upgraded) platform. Someone, please confirm this, if you know.

At Vanguard, you need to fill out a form and have them do the transfer if you are trying to take a distribution of ETF or stock or bond shares and put it in taxable. If you are moving from a traditional IRA to taxable, you use a Brokerage IRA In-Kind Distribution Form.

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Re: Reinvesting RMDs

Post by samsoes » Mon Feb 19, 2018 5:27 am

my name wrote:
Sat Feb 17, 2018 12:21 pm
2. Is there any problem by selling a fund (deferred), then buying the same fund right away (taxable)? I read about wash sales, but this seems to involve how loss is treated?
No problem whatsoever. Wash sale complexities come into play when you sell from taxable and incurr a loss.

If you sell from deferred buy taxable as you propose, then later (within 30 days) sell from taxable and incur a loss: well, that's a different story.
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Re: Reinvesting RMDs

Post by rkhusky » Mon Feb 19, 2018 7:04 am

samsoes wrote:
Mon Feb 19, 2018 5:27 am
my name wrote:
Sat Feb 17, 2018 12:21 pm
2. Is there any problem by selling a fund (deferred), then buying the same fund right away (taxable)? I read about wash sales, but this seems to involve how loss is treated?
No problem whatsoever. Wash sale complexities come into play when you sell from taxable and incurr a loss.

If you sell from deferred buy taxable as you propose, then later (within 30 days) sell from taxable and incur a loss: well, that's a different story.
It's also a wash sale if you sell from taxable at a loss and then buy using the funds from the RMD.

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Re: Reinvesting RMDs

Post by Epsilon Delta » Mon Feb 19, 2018 9:46 am

dbr wrote:
Sun Feb 18, 2018 1:46 pm
The reasoning is circular. You can't use a my share/their share to do the math until you have done the math to establish that my/their is a valid model. If people want to use it as a mnemonic to remember how it comes out, I guess there is nothing terrible about that, but it is a result and not a premise from which one can reason a conclusion because there is not in fact any algorithm in tax law that begins with a government claim on what the government "owns" and what the taxpayer "owns."

An aside on the topic of income tax is the way this works out in property tax. Since property tax is assessed on the value of the holding in perpetuity it would come out that the same reasoning says the government owns an infinite multiple of the value of your property. Yet ownership of private property is one of the sacred tenets of our system of government. Is this an argument that property tax is a confiscatory tax (moderator lock?).
The value of a series of future payments is only infinite if the discount rate is zero, so your second paragraph is simply the result of doing math wrong. In particular either a bad assumption (zero discount rate) or incorrectly summing an infinite series.

On the other hand the considering that a fixed proportion of a tax deferred account is a result of an assumption of a fixed tax rate (an assumption that should be evaluated for correctness) and the basic properties of arithmetic.

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Re: Reinvesting RMDs

Post by Epsilon Delta » Mon Feb 19, 2018 9:52 am

samsoes wrote:
Mon Feb 19, 2018 5:27 am

No problem whatsoever. Wash sale complexities come into play when you sell from taxable and incurr a loss.

If you sell from deferred buy taxable as you propose, then later (within 30 days) sell from taxable and incur a loss: well, that's a different story.
Is it also a wash sale if you sell taxable at a loss and then do a distribution in kind of the same shares within 30 days? My take is that it is, so I would avoid that situation (and thus avoid having to take a position on it with the IRS.)

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Re: Reinvesting RMDs

Post by dbr » Mon Feb 19, 2018 10:09 am

Epsilon Delta wrote:
Mon Feb 19, 2018 9:46 am

The value of a series of future payments is only infinite if the discount rate is zero, so your second paragraph is simply the result of doing math wrong. In particular either a bad assumption (zero discount rate) or incorrectly summing an infinite series.

Yes, my quip made that assumption. It was intended to be provocative. If you value the series of future payment using NPV formalism then with real math it is true that the tax assessment against property for a reasonable number of years could exceed the value of the property depending on whether or not the tax rate exceeds the discount rate, so there is still a theoretical problem that the government owns more than all our property if this sort of reasoning is used. But you don't have to discount the tax payments. You can just as well add them up. In any case no one ever runs around admitting that the government owns any of our property let alone more than all of it. I didn't notice that the people assessing how much the government owns of an IRA's has been discounted as a future payment. Maybe there is more math to be done here.


On the other hand the considering that a fixed proportion of a tax deferred account is a result of an assumption of a fixed tax rate (an assumption that should be evaluated for correctness) and the basic properties of arithmetic.

I don't quite follow what that sentence means.



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