RMD withdrawals.

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Dragonfly
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RMD withdrawals.

Post by Dragonfly » Sun Jan 18, 2015 12:59 pm

I turn 70 1/2 in 2015, and will be required to begin RMD's of my IRA, which is invested 65% bonds, (LT Corp/GNMA) 35% equities (Tot Stk Mkt Idx). I plan to reinvest the RMD into my personal taxable account. My question is, would it be better to take one withdrawal at the beginning of 2015, take monthly withdrawals, or one withdrawal come the end of 2015? I've heard all three strategies. Is one better at maintaining the IRA and it's growth?

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mickeyd
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Re: RMD withdrawals.

Post by mickeyd » Sun Jan 18, 2015 3:19 pm

Dragonfly wrote:I turn 70 1/2 in 2015, and will be required to begin RMD's of my IRA, which is invested 65% bonds, (LT Corp/GNMA) 35% equities (Tot Stk Mkt Idx). I plan to reinvest the RMD into my personal taxable account. My question is, would it be better to take one withdrawal at the beginning of 2015, take monthly withdrawals, or one withdrawal come the end of 2015? I've heard all three strategies. Is one better at maintaining the IRA and it's growth?
Welcome to the forum.

You and I are in the same boat Dragonfly. My AA is more like 50/50 than 35/65. I also plan on making an exchange into my taxable account at the proper time. It all depends on what plans you have for this 2015 cash. If you do not have an immediate need for it (as is my case), you might consider taking it in one lump sum (less tax deduction) near the end of the year. If you are concerned with lower end-of-2015 values, perhaps you might want to receive it monthly or quarterly.

But, what if the market takes a dive and you have to eat the loss? No way to accurately predict the future, unfortunately. I feel that I have received the benefits of delaying receipt/growth of my IRA funds for many years and hope that it all works out in the end.
Last edited by mickeyd on Sun Jan 18, 2015 3:37 pm, edited 1 time in total.
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Re: RMD withdrawals.

Post by tomd37 » Sun Jan 18, 2015 3:26 pm

I guess it is a six of one and a half dozen of another choice. I personally wait until the end of the year to take my RMD so that I can see where the law stands on qualified charitable distributions. If QCD is available in a given year I make the QCD, then take the remaining RMD, and then invest whatever excess amount I want in a taxable account. I do have sufficient cash that I can make the taxable investment anytime during the year and then just reimburse that cash level with my RMD. I wish Congress would make QCDs permanent instead of this one or two year deal. :annoyed
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Re: RMD withdrawals.

Post by DonCamillo » Sun Jan 18, 2015 3:35 pm

On the theory that stocks go up more often than down, I take my RMDs early in the year. I just sold a mutual fund in my IRA and immediately bought the same fund in my taxable account with the same fund company. It was all done at the end of the same day at the same price.

I also had to do my RMD early, because I did a Roth conversion immediately after I got confirmation of the transaction. You have to take your RMD before you can do a Roth Conversion.

I have some after tax money in my IRA, and I am trying to convert it to Roth and or taxable before I retire and take distributions from my accounts with my current employer. I hate having to track the taxable portion.
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Re: RMD withdrawals.

Post by chaz » Sun Jan 18, 2015 3:45 pm

I take my RMD in late December to get the maximum from the compounding.
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Taylor Larimore
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Re: RMD withdrawals.

Post by Taylor Larimore » Sun Jan 18, 2015 3:46 pm

Dragonfly wrote:I turn 70 1/2 in 2015, and will be required to begin RMD's of my IRA, which is invested 65% bonds, (LT Corp/GNMA) 35% equities (Tot Stk Mkt Idx). I plan to reinvest the RMD into my personal taxable account. My question is, would it be better to take one withdrawal at the beginning of 2015, take monthly withdrawals, or one withdrawal come the end of 2015? I've heard all three strategies. Is one better at maintaining the IRA and it's growth?
Dragonfly:

Welcome to the Bogleheads Forum!

I take my RMDs (Required Minimum Distributions) at the end of the year for two primary reasons:

1. Allows maximum (longest) growth of tax-free accumulation in my IRA funds.

2. Avoids filing Quarterly Estimated Tax Returns. When withdrawing RMDs, Vanguard will earmark a designated amount to be sent to the IRS for the entire year required withholding. This is available on their website when requesting RMDs.

Best wishes.
Taylor
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Electron
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Re: RMD withdrawals.

Post by Electron » Sun Jan 18, 2015 5:29 pm

If you are talking about an annual strategy, taking the RMDs at the end of the year should let you take maximum advantage of tax deferred compounding in the IRA.

Note that on average you should have more ordinary income to report on your tax returns compared with taking the RMDs at the beginning of the year. If you dislike ordinary income and its possible effect on your tax return, you could consider taking the RMDs in the beginning of the year. In this case you could potentially accumulate more deferred capital gains in your taxable account. It could also result in more qualified dividends. In reality the differences are probably small. One reason to possibly consider this strategy would be to take maximum advantage of the 0% bracket for capital gains. Ordinary income can reduce the available space in the 10% and 15% brackets.

The RMD in dollars in a given year would be the same either way since it is based on the IRA account value on the previous December 31. But over time the IRA should be larger if taking the RMD at the end of the year.
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Re: RMD withdrawals.

Post by Dragonfly » Sun Jan 18, 2015 6:10 pm

In regards to the RMD, it's to be 100% reinvested. Have no desire to be spending it. If I had it my way, I'd prefer to let the IRA ride till I need it one day, but that's not an option. Tax wise, were talking 28%, plus getting whacked @9.3% in good old Calif, not to mention the medicare income surcharge on both part B and D. Ouch!

In regards to the QCD, while I have no plans as yet to use the QCD, certainly would be nice if congress made it permanent, and stopped waiting to the last minute to extend it.

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Re: RMD withdrawals.

Post by minesweep » Sun Jan 18, 2015 7:40 pm

I begin taking my RMD this year (will turn 70 in March) as well. I have it automatically set up with Vanguard to send it to the IRS (in mid-December) for the same two reasons that Taylor described in his reply. I will no longer have to make those four quarterly estimated tax payments to the IRS every year. Now if only I could have it done for the state as well. :(

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Re: RMD withdrawals.

Post by sport » Sun Jan 18, 2015 10:07 pm

minesweep wrote:Now if only I could have it done for the state as well.
Vanguard will withhold for some states and not others. They will not withhold for my state and I complain to them about that. You may want to do the same. Perhaps with enough complaints, they will allow withholding for any state.
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Re: RMD withdrawals.

Post by kaneohe » Sun Jan 18, 2015 10:10 pm

In some cases, perhaps it may be beneficial to take the RMD earlier in year. Suppose you have balance of 100K with RMD of 4K and are in the 15% bracket with QDIV/LTCG taxed at 0% .

A) Take RMD early. TIRA now has 96K and taxable has 4K invested in (assume) the same low cost index fund as TIRA. Assume growth of 10% in a year.
TIRA now has 105.6K and taxable has 4.4K. After removing 0.6K (15% tax on 4K RMD) from taxable, you have 3.8K in taxable and 105.6K in TIRA for a total of 109.4K.

B) Take RMD late. TIRA grows from 100K to 110K. Remove RMD of 4K leaving 106K in TIRA. After taxes of 0.6K , taxable has 3.4K for a total of 109.4K.
Although the total is the same as case A, the mix is different. The TIRA is larger in Case B but since it is still subject to taxes, its real value is less and so the real value of the total will be less also.

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Re: RMD withdrawals.

Post by scifilover » Mon Jan 19, 2015 9:25 am

When I was handling my father-in-law's affairs, because of his health situation (tenuous), I was advised by his Atty to take his RMD's early in the year. This would prevent the beneficiaries of his IRA from having to take the RMD into their own taxes in an unplanned way. I think this kind of situation might apply to those who are widows/widowers, single etc. I have seen several threads on Ed Slott's IRA Forum in which those who inherited an IRA were stuck in an adverse situation because of failure of the IRA owner to have taken the RMD prior to death.

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Re: RMD withdrawals.

Post by fposte » Mon Jan 19, 2015 9:39 am

scifilover wrote:I have seen several threads on Ed Slott's IRA Forum in which those who inherited an IRA were stuck in an adverse situation because of failure of the IRA owner to have taken the RMD prior to death.
Though that's not automatically a logistical problem--it's not that hard to take the RMD as the heir, in most cases. It's just that you have to know that that's what you're supposed to do and have enough time to do it, especially in the event of a death close to the end of the year.

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CABob
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Re: RMD withdrawals.

Post by CABob » Mon Jan 19, 2015 10:50 am

fposte wrote:
scifilover wrote:I have seen several threads on Ed Slott's IRA Forum in which those who inherited an IRA were stuck in an adverse situation because of failure of the IRA owner to have taken the RMD prior to death.
Though that's not automatically a logistical problem--it's not that hard to take the RMD as the heir, in most cases. It's just that you have to know that that's what you're supposed to do and have enough time to do it, especially in the event of a death close to the end of the year.
I am thinking that this might be a bigger problem than first thought. Heirs, whether they are a spouse or children, are often counseled to not act too rapidly to prevent making unwise choices. They might be consumed by what is considered immediate problems, i.e. final arrangements, paying bills, transferring accounts, life insurance, etc. and contacting an IRA custodian might easily be delayed until after year end.
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Re: RMD withdrawals.

Post by fposte » Mon Jan 19, 2015 10:59 am

CABob wrote:
fposte wrote: Though that's not automatically a logistical problem--it's not that hard to take the RMD as the heir, in most cases. It's just that you have to know that that's what you're supposed to do and have enough time to do it, especially in the event of a death close to the end of the year.
I am thinking that this might be a bigger problem than first thought. Heirs, whether they are a spouse or children, are often counseled to not act too rapidly to prevent making unwise choices. They might be consumed by what is considered immediate problems, i.e. final arrangements, paying bills, transferring accounts, life insurance, etc. and contacting an IRA custodian might easily be delayed until after year end.
Sure, It's something worth considering in your planning, but it really wasn't a problem in my situation to check the RMD and take the remainder within the year. It may depend on how complicated an estate is and how informed your heirs are about what will be transferring. The IRS is apparently also pretty forgiving if you request a waiver for late distribution in such a situation.

So I can see that taking it early may avoid heirs having to deal with the distribution, but it's not automatically a big deal if they end up having to do it.

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Re: RMD withdrawals.

Post by JW-Retired » Mon Jan 19, 2015 11:18 am

Electron wrote:If you are talking about an annual strategy, taking the RMDs at the end of the year should let you take maximum advantage of tax deferred compounding in the IRA.

The RMD in dollars in a given year would be the same either way since it is based on the IRA account value on the previous December 31. But over time the IRA should be larger if taking the RMD at the end of the year.
The RMD in dollars is the same but the RMD as a percentage of the account could have large excursions. Isn't leaving the RMD invested all year at your IRA AA investing short term money inappropriately? You could end up at the end of the year having to withdraw 8% instead of 4% of the account, for example.

I take our RMDs in early January and redeploy it at the AA mix of our taxable and spending accounts.
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Re: RMD withdrawals.

Post by randomguy » Mon Jan 19, 2015 12:20 pm

Electron wrote:If you are talking about an annual strategy, taking the RMDs at the end of the year should let you take maximum advantage of tax deferred compounding in the IRA.

Note that on average you should have more ordinary income to report on your tax returns compared with taking the RMDs at the beginning of the year. If you dislike ordinary income and its possible effect on your tax return, you could consider taking the RMDs in the beginning of the year. In this case you could potentially accumulate more deferred capital gains in your taxable account. It could also result in more qualified dividends. In reality the differences are probably small. One reason to possibly consider this strategy would be to take maximum advantage of the 0% bracket for capital gains. Ordinary income can reduce the available space in the 10% and 15% brackets.

The RMD in dollars in a given year would be the same either way since it is based on the IRA account value on the previous December 31. But over time the IRA should be larger if taking the RMD at the end of the year.
For bonds deferral makes sense but for stocks it is a lot more questionable. The lower taxes (0% vs 15% or 15% versus 25%) and the stepped up cost basis on death (effectively 0% tax) probably makes taking it early the win. But we are talking pretty small numbers here. Not the type to lose sleep over.

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Electron
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Re: RMD withdrawals.

Post by Electron » Mon Jan 19, 2015 1:52 pm

JW Nearly Retired wrote:The RMD in dollars is the same but the RMD as a percentage of the account could have large excursions. Isn't leaving the RMD invested all year at your IRA AA investing short term money inappropriately? You could end up at the end of the year having to withdraw 8% instead of 4% of the account, for example.

I take our RMDs in early January and redeploy it at the AA mix of our taxable and spending accounts.
That's a good point that one may need to address their asset allocation in conjunction with the annual RMD. However, for many the impact may be very small and not even trigger an asset allocation change. Note also that the RMD percentage rises every year. Here are a few values from the IRS table showing Age, Divisor, and Percentage.

Code: Select all

70	27.4	3.65%
71	26.5	3.77%
72	25.6	3.91%
73	24.7	4.05%
74	23.8	4.20%
75	22.9	4.37%
76	22.0	4.55%
77	21.2	4.72%
78	20.3	4.93%
79	19.5	5.13%
80	18.7	5.35%
81	17.9	5.59%
82	17.1	5.85%
83	16.3	6.13%
84	15.5	6.45%
85	14.8	6.76%
In terms of the merit of the early versus late RMD when it gets invested in a taxable account, maybe the solution is to calculate one's after-tax net worth for both cases. That should answer the question.

If you believe the thesis that both stock and bond returns will be lower over the next 5-10 years, then the timing of the RMD would become even less important. Domestic bonds seem very extended right now assuming that deflation in this country is avoided. Bond returns currently project at very low numbers based on the current yields. One theory is that Europeans are buying our bonds based on higher yields and possibly the currency play as well. U.S. based dividend paying stocks have also attracted a lot of foreign investment. Stock returns also project to less than recent years based on the high PE ratios. We have seen a significant PE expansion since 2009.
Electron

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Re: RMD withdrawals.

Post by Aptenodytes » Mon Jan 19, 2015 1:59 pm

If you stick with the same approach every year there won't be any significant difference among these, though the first-of-year will have a very tiny expected advantage.

If you try to guess which will be best each year you will suffer.

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Re: RMD withdrawals.

Post by Garco » Mon Jan 19, 2015 3:34 pm

Having gone back and forth in my thinking about the best timing for RMD's from a strictly financial point of view, I was persuaded by a different voice -- my wife -- who said she really wants to get a "monthly paycheck" to regulate our household spending during the year.

Having gone back and forth about my wife's plea, we settled on an approximation: take RMD payments on a quarterly basis. There is now peace in the family. In any case there will be monthly contributions from Social Security. We just have to plan for the quarterly lumps.

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Re: RMD withdrawals.

Post by HIinvestor » Mon Jan 19, 2015 3:39 pm

We have several accounts that require RMDs. One automatically gives monthly RMD amounts and corrects in December as needed. The other two, we just take the RMD before 12/31--whenever we decide it's a good time to do. Once we were considering doing a conversion to Roth IRA so we took the RMD and then didn't do the conversion. The other times, we took them in early December. We didn't really overthink it so much. The nice thing about taking it in December is it helps cushion holiday bills. ;) The nice thing about the monthly amounts is that they become a part of the monthly assets to pay bills, etc.

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Re: RMD withdrawals.

Post by sport » Mon Jan 19, 2015 3:40 pm

Garco wrote:Having gone back and forth in my thinking about the best timing for RMD's from a strictly financial point of view, I was persuaded by a different voice -- my wife -- who said she really wants to get a "monthly paycheck" to regulate our household spending during the year.

Having gone back and forth about my wife's plea, we settled on an approximation: take RMD payments on a quarterly basis. There is now peace in the family. In any case there will be monthly contributions from Social Security. We just have to plan for the quarterly lumps.
Garco,
You have addressed cash flow. However this is different than RMD withdrawals. Consider: You could make your entire RMD in January, and put the money into a short term bond fund in a taxable account. You could then withdraw from that account monthly (or even weekly) to meet your spending needs. Alternatively, you could withdraw from the IRA periodically as you have described. However, this still does not address the question of the best time to make RMD withdrawals.
Jeff

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Garco
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Re: RMD withdrawals.

Post by Garco » Mon Jan 19, 2015 3:46 pm

Thanks, Jeff, for the suggestion regarding where to store the cash distribution prior to putting into spending budget.

As you note, however, it's still not settled whether end of year or beginning of year is preferred for a single-scoop RMD. I gravitated toward quarterly in part because I think it's consistent with a dollar cost averaging approach, or at least spreading the risk across the market year rather than committing once and for all time to make December or January withdrawals of rather large lumps of cash.
Last edited by Garco on Mon Jan 19, 2015 3:50 pm, edited 1 time in total.

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Re: RMD withdrawals.

Post by CABob » Mon Jan 19, 2015 3:50 pm

Garco wrote:Having gone back and forth in my thinking about the best timing for RMD's from a strictly financial point of view, I was persuaded by a different voice -- my wife -- who said she really wants to get a "monthly paycheck" to regulate our household spending during the year.

Having gone back and forth about my wife's plea, we settled on an approximation: take RMD payments on a quarterly basis. There is now peace in the family. In any case there will be monthly contributions from Social Security. We just have to plan for the quarterly lumps.
You forgot rule #1, Keep wife happy! :D
Seriously however, I don't see much difference between a monthly withdrawal and a quarterly withdrawal from a financial or any other point of view. Just be sure you have your taxes addressed.
Bob

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Re: RMD withdrawals.

Post by Christine_NM » Mon Jan 19, 2015 4:26 pm

Dragonfly -

I have a money market account in the IRA and make sure the RMD is there in cash in January based on the Dec 31 value. Then I take the RMD whenever I want without worrying about markets being up or down.

I get some quarterly income. It doesn't sound bad, but 3 months can be a long dry spell. If you need this money to pay monthly bills I would take it monthly from an IRA money market fund set up with the correct amount early in the year and/or late the previous year.
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Re: RMD withdrawals.

Post by Garco » Mon Jan 19, 2015 5:28 pm

Christine, that's kind of my thinking. To stock the MM and draw RMD's from there rather than directly from my investments. But I wouldn't put the whole amount into MM at a single point in time -- either end of year or beginning of year. Rather, I would put it there on a quarterly basis, or rather put it there at some point in the quarter to assure that it could meet my RMD requirement on the distribution date. Since I won't automatically take the money proportionately from each fund I'm invested in, I also won't be locked into a single formula regardless of how the market performs over the course of the year.

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Re: RMD withdrawals.

Post by itstoomuch » Mon Jan 19, 2015 5:51 pm

DCA in.
DCA out.
Unless you find either a RBD for inna or RGD for the outa. 8-)
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Re: RMD withdrawals.

Post by Electron » Mon Jan 19, 2015 5:59 pm

JW Nearly Retired wrote:The RMD in dollars is the same but the RMD as a percentage of the account could have large excursions. Isn't leaving the RMD invested all year at your IRA AA investing short term money inappropriately? You could end up at the end of the year having to withdraw 8% instead of 4% of the account, for example.
I assume the large excursions would occur due to large moves in the stock and bond markets. Since the RMD dollar amount is fixed every December 31, the percentage of the account withdrawn will vary based on the value of the account on the date of the RMD. I'm not sure the RMD should be considered short term money until it is withdrawn. In regards to the last point, waiting until the end of the year could also help if you are concerned about withdrawing at a low point. The market could have declined in the fall and winter and then rebounded strongly the following year into December.

Others have mentioned quarterly or monthly withdrawals to satisfy the RMD and that might have some definite advantages. Imagine a large withdrawal on 3-09-09 at the market low. Quarterly or Monthly withdrawals would average things out.

However, in regards to this thread, the OP will be reinvesting the RMD in a taxable investment account on the same trading day so the timing may not be an issue.
Electron

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Garco
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Re: RMD withdrawals.

Post by Garco » Tue Jan 20, 2015 11:35 am

Electron wrote:
JW Nearly Retired wrote:The RMD in dollars is the same but the RMD as a percentage of the account could have large excursions. Isn't leaving the RMD invested all year at your IRA AA investing short term money inappropriately? You could end up at the end of the year having to withdraw 8% instead of 4% of the account, for example.
I assume the large excursions would occur due to large moves in the stock and bond markets. Since the RMD dollar amount is fixed every December 31, the percentage of the account withdrawn will vary based on the value of the account on the date of the RMD. I'm not sure the RMD should be considered short term money until it is withdrawn. In regards to the last point, waiting until the end of the year could also help if you are concerned about withdrawing at a low point. The market could have declined in the fall and winter and then rebounded strongly the following year into December.

Others have mentioned quarterly or monthly withdrawals to satisfy the RMD and that might have some definite advantages. Imagine a large withdrawal on 3-09-09 at the market low. Quarterly or Monthly withdrawals would average things out.

However, in regards to this thread, the OP will be reinvesting the RMD in a taxable investment account on the same trading day so the timing may not be an issue.
I don't think this moots the argument. For one thing, you must pay income taxes due (federal and state) on your RMD before reinvesting the remainder in taxable account, so you could easily be reinvesting 20-30% less than you remove. For another, if you take your RMD's in a single annual withdrawal (on a single day) by formula, this could be at high(er) point OR low(er) point in size of the accumulation.

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Re: RMD withdrawals.

Post by Aptenodytes » Tue Jan 20, 2015 11:50 am

I don't get the timing concerns. For most people the time horizon will be 20 years or more. If you are consistent the highs and lows will offset. When your portfolio is biggest your RMDs are smallest, in percentage terms, unless the portfolio is growing faster than you are withdrawing, in which case your worries should be diminishing anyway.

In any event, we accept that we cannot predict when the market will be high or low, so we have to rule out timing the RMD just right. Therefore we have no choice but to rely on random variation to smooth out the risk, right? There are enough real things to worry about that we shouldn't have to dream up new ones.

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Re: RMD withdrawals.

Post by tadamsmar » Tue Jan 20, 2015 11:51 am

DonCamillo wrote:On the theory that stocks go up more often than down, I take my RMDs early in the year. I just sold a mutual fund in my IRA and immediately bought the same fund in my taxable account with the same fund company.
Why would the fact that stock go up more than down cause you to do it early in the year?

Unless I am mistaken, the RMD is determined based on the year-end account value of the preceding year. So you will on average leave more in your tax-deferred accounts if you take the RMD late in the year.

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Re: RMD withdrawals.

Post by Aptenodytes » Tue Jan 20, 2015 12:00 pm

tadamsmar wrote:
DonCamillo wrote:On the theory that stocks go up more often than down, I take my RMDs early in the year. I just sold a mutual fund in my IRA and immediately bought the same fund in my taxable account with the same fund company.
Why would the fact that stock go up more than down cause you to do it early in the year?

Unless I am mistaken, the RMD is determined based on the year-end account value of the preceding year. So you will on average leave more in your tax-deferred accounts if you take the RMD late in the year.
In a taxable account withdrawals are taxed at the long-term capital gains rate, and only the gains are taxed; in a tax-deferred account withdrawals are taxed at your marginal income tax rate, which can easily be higher. So you want the tax-deferred to grow more slowly than the taxable, under most circumstances.

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Re: RMD withdrawals.

Post by tadamsmar » Tue Jan 20, 2015 1:16 pm

Aptenodytes wrote:
tadamsmar wrote:
DonCamillo wrote:On the theory that stocks go up more often than down, I take my RMDs early in the year. I just sold a mutual fund in my IRA and immediately bought the same fund in my taxable account with the same fund company.
Why would the fact that stock go up more than down cause you to do it early in the year?

Unless I am mistaken, the RMD is determined based on the year-end account value of the preceding year. So you will on average leave more in your tax-deferred accounts if you take the RMD late in the year.
In a taxable account withdrawals are taxed at the long-term capital gains rate, and only the gains are taxed; in a tax-deferred account withdrawals are taxed at your marginal income tax rate, which can easily be higher. So you want the tax-deferred to grow more slowly than the taxable, under most circumstances.
Assume a .25 income tax rate and .15 cap gains tax rate. If you withdraw late in the year, then you eventually get to consume .75 of the year's gain on the RMD. But if withdraw early, then you only get to consume .75*.85 of those gains. And, it's a loser for all fixed rates, not just the ones I quoted.

The only way you win is if the tax rates change.

kaneohe
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Re: RMD withdrawals.

Post by kaneohe » Tue Jan 20, 2015 2:17 pm

tadamsmar wrote:
Aptenodytes wrote:
tadamsmar wrote:
DonCamillo wrote:On the theory that stocks go up more often than down, I take my RMDs early in the year. I just sold a mutual fund in my IRA and immediately bought the same fund in my taxable account with the same fund company.
Why would the fact that stock go up more than down cause you to do it early in the year?

Unless I am mistaken, the RMD is determined based on the year-end account value of the preceding year. So you will on average leave more in your tax-deferred accounts if you take the RMD late in the year.
In a taxable account withdrawals are taxed at the long-term capital gains rate, and only the gains are taxed; in a tax-deferred account withdrawals are taxed at your marginal income tax rate, which can easily be higher. So you want the tax-deferred to grow more slowly than the taxable, under most circumstances.
Assume a .25 income tax rate and .15 cap gains tax rate. If you withdraw late in the year, then you eventually get to consume .75 of the year's gain on the RMD. But if withdraw early, then you only get to consume .75*.85 of those gains. And, it's a loser for all fixed rates, not just the ones I quoted.

The only way you win is if the tax rates change.
What happens at a lower bracket: 15% ordinary and 0% CG rates?

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Electron
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Re: RMD withdrawals.

Post by Electron » Tue Jan 20, 2015 2:51 pm

tadamsmar wrote:Assume a .25 income tax rate and .15 cap gains tax rate. If you withdraw late in the year, then you eventually get to consume .75 of the year's gain on the RMD. But if withdraw early, then you only get to consume .75*.85 of those gains. And, it's a loser for all fixed rates, not just the ones I quoted.
I also think it is best on average to take the RMD as late as possible to take advantage of the tax deferred compounding.

Taking the RMD early and investing in a taxable account typically has added tax costs every year for dividends unless the 0% tax bracket is available. I'm assuming an investment in a Total Stock Market Index fund paying out perhaps 2% per year in qualified dividends and deferring all capital gains. Most investors are hoping that capital gains distributions will be avoided in the future in those funds but that is not a certainty.
Last edited by Electron on Tue Jan 20, 2015 2:54 pm, edited 1 time in total.
Electron

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BigFoot48
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Re: RMD withdrawals.

Post by BigFoot48 » Tue Jan 20, 2015 2:52 pm

My mother-in-law's IRA only has bonds and bond funds in it so I've never been concerned about market changes influencing the timing. My father-in-law died in November and the RMD he had scheduled for December was made automatically while the IRA was still in his name, and we transferred the IRA to her in late December (TOD). So the potential problem of transferring the RMD requirement to heirs never occurred.

I like December as I can adjust her withholding to be very close to what she will owe in Federal taxes. I plan to do the same for my RMD when it starts in five years. (My wife may have inherited the above IRA by then and the total RMD is going to be rather large - pay-the-piper time will have arrived!)
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 12-time loser

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tadamsmar
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Re: RMD withdrawals.

Post by tadamsmar » Tue Jan 20, 2015 3:27 pm

kaneohe wrote:
tadamsmar wrote:
Aptenodytes wrote:
tadamsmar wrote:
DonCamillo wrote:On the theory that stocks go up more often than down, I take my RMDs early in the year. I just sold a mutual fund in my IRA and immediately bought the same fund in my taxable account with the same fund company.
Why would the fact that stock go up more than down cause you to do it early in the year?

Unless I am mistaken, the RMD is determined based on the year-end account value of the preceding year. So you will on average leave more in your tax-deferred accounts if you take the RMD late in the year.
In a taxable account withdrawals are taxed at the long-term capital gains rate, and only the gains are taxed; in a tax-deferred account withdrawals are taxed at your marginal income tax rate, which can easily be higher. So you want the tax-deferred to grow more slowly than the taxable, under most circumstances.
Assume a .25 income tax rate and .15 cap gains tax rate. If you withdraw late in the year, then you eventually get to consume .75 of the year's gain on the RMD. But if withdraw early, then you only get to consume .75*.85 of those gains. And, it's a loser for all fixed rates, not just the ones I quoted.

The only way you win is if the tax rates change.
What happens at a lower bracket: 15% ordinary and 0% CG rates?
I calculate break even if the CG rate is 0% regardless of the ordinary. Again, assuming rates are the same when the RMD is taken and when the investments are eventually consumed. But that is not counting ordinary the tax on dividends for taxable.

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Re: RMD withdrawals.

Post by Alan S. » Tue Jan 20, 2015 5:10 pm

Assuming that early year RMDs will on average result in more dollars in taxable and less remaining in the IRA for future RMDs, a typical retiree would not be holding the added taxable dollars in a different AA than they otherwise would maintain. The weighted rate would be somewhere in between the LT cap gain rate and full ordinary income rates.

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Re: RMD withdrawals.

Post by Van » Tue Jan 20, 2015 5:14 pm

chaz wrote:I take my RMD in late December to get the maximum from the compounding.
Me too.

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Re: RMD withdrawals.

Post by Rammstein » Wed Jan 28, 2015 12:12 pm

I am thinking that this might be a bigger problem than first thought. Heirs, whether they are a spouse or children, are often counseled to not act too rapidly to prevent making unwise choices. They might be consumed by what is considered immediate problems, i.e. final arrangements, paying bills, transferring accounts, life insurance, etc. and contacting an IRA custodian might easily be delayed until after year end.
+1!

As someone who inherited multiple IRA's with RMD's from parents who died unexpectedly a few years ago, I am very grateful that they were thoughtful enough to have made their RMD's early in the year prior to their death. A few years ago, I didn't even know what an RMD was, even though I instantly became the personal representative of my parent's estate. I had a lot of learning to do about estates, RMD's, beneficiaries, insurance policies, investments all at a time when I was grieving the loss of my parents. Now that I am familiar with RMD's they are no big deal, but when someone is totally ignorant about RMD's and has to deal with them while dealing with many other more important issues such as loss of a loved one, they can be overwhelming and overlooked. If any of you have heirs that are not familiar with RMD's, perhaps you might want to have a talk with them to educate them about RMD's. You also might want to consider taking your RMD's early in the year if making things go as smoothly for your heirs as possible is a priority.

I assume most of this discussion has been among folks over 70.5 taking RMD's. I'm in my mid 40's and I take my inherited RMD's at the beginning of the year prior to April 15th. This allows me to complete my taxes and use my RMD's to top off our IRA and Roth IRA contributions based on our taxes and then place the remainder in our taxable investments.

By the way, thanks to the Bogleheads community for significantly helping with my education in investing and RMD's. When my parents died, I was being actively pursued by their ML Adviser. Based on information I gleaned from this website and a book by Rick Ferri I started asking questions about the ~2.0% fees I was paying and moved my money to Portfolio Solutions. After I manage to just stand there and not do anything the next time the market tanks, I'll probably try to do the investment management myself, but I really needed the help of an investment adviser in consolidating a lot of inherited investment accounts.

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Re: RMD withdrawals.

Post by Garco » Thu Jan 29, 2015 1:29 am

Rammstein wrote: By the way, thanks to the Bogleheads community for significantly helping with my education in investing and RMD's. When my parents died, I was being actively pursued by their ML Adviser. Based on information I gleaned from this website and a book by Rick Ferri I started asking questions about the ~2.0% fees I was paying and moved my money to Portfolio Solutions. After I manage to just stand there and not do anything the next time the market tanks, I'll probably try to do the investment management myself, but I really needed the help of an investment adviser in consolidating a lot of inherited investment accounts.
[
I assume most of this discussion has been among folks over 70.5 taking RMD's. I'm in my mid 40's and I take my inherited RMD's at the beginning of the year prior to April 15th. This allows me to complete my taxes and use my RMD's to top off our IRA and Roth IRA contributions based on our taxes and then place the remainder in our taxable investments.

By the way, thanks to the Bogleheads community for significantly helping with my education in investing and RMD's. When my parents died, I was being actively pursued by their ML Adviser. Based on information I gleaned from this website and a book by Rick Ferri I started asking questions about the ~2.0% fees I was paying and moved my money to Portfolio Solutions. After I manage to just stand there and not do anything the next time the market tanks, I'll probably try to do the investment management myself, but I really needed the help of an investment adviser in consolidating a lot of inherited investment accounts.
I'm sympathetic to your situation. I inherited a mishmash of investments and needed advice in sorting them out, selling off some, and reinvesting. Most of my previous money was in tax deferred accounts, and getting a lot of different types of investments in the inherited funds required some strategic and tactical (i.e., tax) understanding.

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Re: RMD withdrawals.

Post by Parthenon » Fri Jan 30, 2015 12:37 am

One consideration you may want to think about is using the distribution or parts of it as your charitable contributions, which if you have them invested with Vanguard, they will issue a check to whomever you wish and mail it to you so you can mail it to the charity and receive the proper receipt. This way if congress eventually late in the year authorizes Qualified Charitable Distributions again you will be covered. And if they don't you can still use those contributions as deductions on Schedule A, if you have enough to itemize. The crucial part of these donations is that they must be the very first withdrawals of your Required Minimum Distributions from an IRA.

I'm not sure if Vanguard places a minimum dollar amount on the checks they will write for you; it's probably something to call them and ask.

Ed
"What am I gonna do if I run out of money?"

kaneohe
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Re: RMD withdrawals.

Post by kaneohe » Fri Jan 30, 2015 1:25 am

Parthenon wrote:..................................... Qualified Charitable Distributions........................... The crucial part of these donations is that they must be the very first withdrawals of your Required Minimum Distributions from an IRA.
Ed
They should be among the the very first withdrawals but they don't have to be the very first. As long as they are taken and are within your RMD, you can withdraw only your RMD. They can still be QCDs later but then you may be withdrawing more than your RMD.

Dandy
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Re: RMD withdrawals.

Post by Dandy » Fri Jan 30, 2015 7:00 am

Since stocks, over time appreciate more than bonds that would favor leaving the RMD until the end of the year so you would possibly squeeze more growth out of your IRA. With only a 35% equity allocation, that mutes this potential benefit a bit.

I haven't reached the RMD requirement yet but one thing in favor doing it at the beginning of the year is making sure it gets done. Waiting until December with the holidays, and a bit of memory challenge might someday be an issue. That speaks to consolidating your IRAs in one provider also and automating the RMD process.

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