Strategies for RMDs [Required Minimum Distributions]

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malloc
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Strategies for RMDs [Required Minimum Distributions]

Post by malloc » Sat Sep 05, 2015 3:04 pm

RMD is forced in December, if not taken earlier.

Method One: Take it in December so that the money is exposed to the market for the maximum amount of time, before withdrawal and taxes.

Method Two: Take monthly withdrawals so that you are not exposed to a market downturn in the latter part of the year.

I had assumed that method one was superior, but now I am having second thoughts. I am considering the question in general, not just this year.

I would be interested in other insightful views on the subject.

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Re: Strategies for RMDs

Post by livesoft » Sat Sep 05, 2015 3:10 pm

Method Three: Take it January so you don't forget about it and if you die that year your heirs don't have to deal with it.
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Re: Strategies for RMDs

Post by mickeyd » Sat Sep 05, 2015 3:15 pm

I had assumed that method one was superior, but now I am having second thoughts. I am considering the question in general, not just this year
You and I are boat-mates. I plan on taking it as your method one. No way to tell which is better. Would I have done better taking my RMD in January 2015 before this current stock dip? Or, will there be a stock surge starting Tuesday that drives it back up to record territory? Long-term I don't think it makes much difference.

I plan on living a long time and I like my chances better with method one.
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Re: Strategies for RMDs

Post by wbrianwhite » Sat Sep 05, 2015 3:23 pm

Isn't this basically the same as the arguments for and against dollar coat averaging when acquiring stocks and bonds, just on the other side?

Were you a dollar cost averaged during your accumulation phase?
Did you put money in the market as soon as you had it available?
Did you try to time the market during your acquisition phase?

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Re: Strategies for RMDs

Post by Raven2 » Sat Sep 05, 2015 3:26 pm

The same decision can be applied to placing a lump sum into the market instead of taking it out. Statistically putting in the entire amount at the earliest possible time and taking amounts out at the latest possible time benefits from a rising market over the years. However many people still prefer Dollar Cost Averaging for both in and out transfers.

Another thought, if the market is low when you withdraw, and you do not need the money, you can simply transfer the RMD into an identical fund in a taxable account.

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Re: Strategies for RMDs

Post by malloc » Sat Sep 05, 2015 3:41 pm

if the market is low when you withdraw, and you do not need the money, you can simply transfer the RMD into to an identical fund in a taxable account.
Cute, and similar to what I have done in the past - paying taxes as well, of course.

This problem is not quite the same as dollar cost averaging vs lump sum, since in that situation if you are not sure what to do, you can do neither and just go fishing instead. It is the requirement of the withdrawal that makes this different.

That said, I have a preference for simplicity - I am just not sure which method to pick and then (probably) set on autopilot.

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Re: Strategies for RMDs

Post by mickeyd » Sat Sep 05, 2015 3:45 pm

malloc wrote:
if the market is low when you withdraw, and you do not need the money, you can simply transfer the RMD into to an identical fund in a taxable account.
Cute, and similar to what I have done in the past - paying taxes as well, of course.

This problem is not quite the same as dollar cost averaging vs lump sum, since in that situation if you are not sure what to do, you can do neither and just go fishing instead. It is the requirement of the withdrawal that makes this different.

That said, I have a preference for simplicity - I am just not sure which method to pick and then (probably) set on autopilot.
Its' always good to recall that RMD is a requirement to pay taxes, not a requirement to spend.
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Re: Strategies for RMDs

Post by Kevin M » Sat Sep 05, 2015 4:00 pm

Ability to take the RMD in December indicates that you don't need the money for residual living expenses. In this case, taking the RMD just requires shifting the money from one or more investments in the IRA to one or more similar investments in taxable, doing whatever makes the most sense to maintain policy asset allocation in a tax-efficient manner. For example, you might take distributions from a taxable bond fund or CDs in the IRA, but put the proceeds in a tax-exempt bond fund in taxable.

I like to take mine in December, as I have a better idea of what income taxes will be owed then, so I can have sufficient taxes withheld to avoid any late payment penalties. Also, this way I don't give the IRS an interest-free loan for longer than necessary.

My RMD just goes into my savings account, so it's just part of my fixed income allocation, and could be used to rebalance into stocks if my investment policy so dictates. I have mostly fixed income in my IRAs, so taking the RMD doesn't change my AA at the top level. If I had stocks and fixed income in the IRA, I would take distributions from stocks only if they were over target allocation, and this would be a rebalancing move.

I'd just as soon see the value of investments in my IRA go down as those in my taxable account, since that will reduce RMDs (and hence taxes) the following year.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by LadyGeek » Sat Sep 05, 2015 4:03 pm

This thread is now in the Personal Finance (Not Investing) forum (withdrawal strategy). I also retitled the thread to help with the acronym.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by sport » Sat Sep 05, 2015 4:10 pm

If you are planning to make QCDs in the hope that the law that allows them will be renewed, then you have to wait until your donations have been completed and then withdraw the remains of the RMD. If you know what you want to donate, you can accelerate the donations to the early part of the year. This would give you more freedom on the timing for the rest of the year.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by randomguy » Sat Sep 05, 2015 4:20 pm

Raven2 wrote:The same decision can be applied to placing a lump sum into the market instead of taking it out. Statistically putting in the entire amount at the earliest possible time and taking amounts out at the latest possible time benefits from a rising market over the years. However many people still prefer Dollar Cost Averaging for both in and out transfers.

Another thought, if the market is low when you withdraw, and you do not need the money, you can simply transfer the RMD into an identical fund in a taxable account.
We just did this in another thread.:) You are not going to end up with more money by taking RMDs when the market is low with most normal assumptions. You pay less in taxes AND end up with less net money. Lose Lose:)

The issue with taking it in Dec is that you will have spent other taxable money along the way. You might have been better off investing that money and getting either the gains or losses in taxable.

In the end this is the type of decision you can debate for a long time. It pretty much doesn't matter as you are taking a few percent etiher way and the assumptions are going to have big enough error ranges to justify anything.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by mhalley » Sat Sep 05, 2015 4:28 pm

One advantage of taking the RMD in December is that you don't have to worry about the estimated taxes throughout the year. I was just reading about this in an investment book. Ahh, here is the reference: Jim Lange Retire Secure, third edition (recent thread on getting it for price of shipping).
viewtopic.php?t=171935
In his chapter on RMD, he recommends taking them as late as possible. He states Dec 31 is ideal, but since nothing is perfect he rec. around thanksgiving, first week of Dec to ensure there are no snafu. (Of course this is if you don't need them for your day to day expenses). By taking the distribution late, and having the taxes withheld, you are in effect, getting an interest free loan from the IRS. If you have the taxes withheld from the distribution, the IRS treats it as an even rate of payment. In addition, if you are paying estimated taxes throughout the year on other income, if you add those taxes into the withholding amount, you can completely forego the quarterly income taxes making your entire tax bill be "floated" by the IRS, as long as the taxes owed do not exceed the amount taxes withheld from the RMD.
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Re: Strategies for RMDs

Post by Gill » Sat Sep 05, 2015 4:32 pm

livesoft wrote:Method Three: Take it January so you don't forget about it and if you die that year your heirs don't have to deal with it.
This is the strategy I have adopted in recent years.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by Minot » Sat Sep 05, 2015 5:10 pm

sport wrote:If you are planning to make QCDs in the hope that the law that allows them will be renewed, then you have to wait until your donations have been completed and then withdraw the remains of the RMD. If you know what you want to donate, you can accelerate the donations to the early part of the year. This would give you more freedom on the timing for the rest of the year.
Do you know something I don't? I've assumed that I can take part of my RMD early in the year and then do QCDs on all or part of the remainder later. Is this not true?

I've also assumed that I can write a check to charity on one of the funds in my IRA and on that same day, make a withdrawal by transferring funds from my IRA to my taxable account, and have the value of the check to charity be a legitimate QCD and have both withdrawals count toward my RMD. Again, am I wrong about this?

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by dbr » Sat Sep 05, 2015 5:19 pm

malloc wrote:RMD is forced in December, if not taken earlier.

Method One: Take it in December so that the money is exposed to the market for the maximum amount of time, before withdrawal and taxes.

Method Two: Take monthly withdrawals so that you are not exposed to a market downturn in the latter part of the year.

I had assumed that method one was superior, but now I am having second thoughts. I am considering the question in general, not just this year.

I would be interested in other insightful views on the subject.
Method two makes no sense as why were you in the market in the first place if you don't want exposure to losses. To put it differently, if you have changed your mind about your risk exposure, sell the risky assets and put the money in risk free assets in the same account. That would have nothing to do with RMDs

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by sport » Sat Sep 05, 2015 5:20 pm

Minot wrote:
sport wrote:If you are planning to make QCDs in the hope that the law that allows them will be renewed, then you have to wait until your donations have been completed and then withdraw the remains of the RMD. If you know what you want to donate, you can accelerate the donations to the early part of the year. This would give you more freedom on the timing for the rest of the year.
Do you know something I don't? I've assumed that I can take part of my RMD early in the year and then do QCDs on all or part of the remainder later. Is this not true?

I've also assumed that I can write a check to charity on one of the funds in my IRA and on that same day, make a withdrawal by transferring funds from my IRA to my taxable account, and have the value of the check to charity be a legitimate QCD and have both withdrawals count toward my RMD. Again, am I wrong about this?
You are correct. However, if you take all of your RMD early in the year, as some suggest, then you cannot make later QCDs and have them count towards your RMD. You can still make the QCDs (assuming the law allows), but you will pay full taxes on the RMD.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by Dandy » Sat Sep 05, 2015 5:43 pm

I am 2.5 year away from RMD. I was planning on taking it late in the year -- letting the money work a bit longer each year. But, I have recently had more concerns that my non financial wife might not remember to take it if I was sick late in the year (or worse). Then I thought of taking it in a lump at the beginning of the year and putting it in an online savings account and drawing it down each month while earning interest.

Now I'm thinking of taking it monthly from Vanguard direct to my checking. Automates it for my wife, no risk of not taking out enough and leaving some of it in my TIRA a bit longer.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by CABob » Sat Sep 05, 2015 8:12 pm

When you ask about a "superior" method are you asking about financially superior or superior for some other consideration? I don't think there is a financially superior method and to consider it seems to me to be a market timing consideration.

Personally, I take a single RMD late in the year. My reasoning is that it allows the tax deferral for as long as possible. Also I have my income tax withheld from the RMD so I am not paying the IRS any earlier than I need to. I then need to make the decision as to what to do with the RMD only once (reinvest, put in spending account, etc.)
If I needed the RMD for spending earlier or throughout the year perhaps a monthly withdrawal would be considered.
Livesoft's suggestion for an early in the year RMD does have merit for some.
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Re: Strategies for RMDs

Post by joe8d » Sat Sep 05, 2015 11:00 pm

livesoft wrote:Method Three: Take it January so you don't forget about it and if you die that year your heirs don't have to deal with it.
:thumbsup That what and why I do the same.Also taking from TSM and placing in taxable allows QDI treatment going forward and Zero Cost basis for future heirs.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by JoinToday » Sat Sep 05, 2015 11:07 pm

mhalley wrote:One advantage of taking the RMD in December is that you don't have to worry about the estimated taxes throughout the year. .... In his chapter on RMD, he recommends taking them as late as possible. ,,,, By taking the distribution late, and having the taxes withheld, you are in effect, getting an interest free loan from the IRS. If you have the taxes withheld from the distribution, the IRS treats it as an even rate of payment. In addition, if you are paying estimated taxes throughout the year on other income, if you add those taxes into the withholding amount, you can completely forego the quarterly income taxes making your entire tax bill be "floated" by the IRS, as long as the taxes owed do not exceed the amount taxes withheld from the RMD.
Mike
I have 2 questions: (1) assuming 25% of my income goes to taxes, can I take 4 RMDs, say April 1, July 1, Oct 1, and Dec 1, and just give the Fed Gov't and Calif the entire Dec 1 part, and call it good? Or do I need to give them 25% of each withdrawal. (2) for roth conversions, do I need to pay when I do the withdrawal, or can I wait until the end of the year to make the tax payment (or april 15 of the following year)? Does it raise a red flag if you make one estimated tax payment in the year?
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by Gattamelata » Sat Sep 05, 2015 11:10 pm

randomguy wrote:
raven2 wrote: Another thought, if the market is low when you withdraw, and you do not need the money, you can simply transfer the RMD into an identical fund in a taxable account.
We just did this in another thread.:) You are not going to end up with more money by taking RMDs when the market is low with most normal assumptions. You pay less in taxes AND end up with less net money. Lose Lose:)
At the risk of taking the discussion beyond "most normal assumptions," that advice doesn't apply to my situation. I'm in the accumulation phase and in the middle of RMDs. Because of this, the additional taxes that the RMDs generate are an important concern for me, especially since I just take the full amount of the RMDs and buy index funds in my taxable account, and then pay the taxes due on the RMDs with my discretionary spending money, so there's no "less net money."

As it happens, I have so far taken the RMDs in December in service of the "let the funds grow tax-deferred as long as possible" principle, but I have been considering trying to take RMDs when the valuations are low so that I extract the largest value out of the IRA for each federally-mandated RMD tax dollar that I have to pay. The benefit there is that future RMDs are lower, which means less tax at my marginal rate in the future, and I don't "end up with less net money" because that money is being put right back into the market at the same valuation as when it was removed.

You're right, I wouldn't end up with more money from the IRA by doing that, but I would end up with fewer taxes paid in the long run. Furthermore, the threat that the RMDs pose to my Roth IRA eligibility would be reduced. So far I haven't tried this, because I'm wary of market timing, but I have decided to try to pick "the moment" each year and record my choice so I can assess in a few years how I would have done with the strategy.

I realize that RMDs-during-accumulation is a scenario that most Bogleheads don't think much about, but I think it's worth considering, given that inheriting traditional IRAs isn't exactly an uncommon scenario.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by CABob » Sat Sep 05, 2015 11:38 pm

JoinToday wrote:
I have 2 questions: (1) assuming 25% of my income goes to taxes, can I take 4 RMDs, say April 1, July 1, Oct 1, and Dec 1, and just give the Fed Gov't and Calif the entire Dec 1 part, and call it good? Or do I need to give them 25% of each withdrawal. (2) for roth conversions, do I need to pay when I do the withdrawal, or can I wait until the end of the year to make the tax payment (or april 15 of the following year)? Does it raise a red flag if you make one estimated tax payment in the year?
Taxes paid by withholding are considered to have been paid throughout the year so in either of your questions that taxes can be withheld from a single withdrawal. In question number two however there is no way to delay paying taxes until April 15 of the following year without the danger of a penalty for underpayment.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by heyyou » Sun Sep 06, 2015 1:12 am

I second the post above.
Employers withhold taxes from every paycheck and send it to the IRS after the end of each quarter. If you have income and are not an employee, you have to pay your estimated taxes quarterly, due about two weeks after the end of each quarter, Jan 15 for the fourth quarter.

The good exception is on traditional IRA (tIRA) withdrawals (including RMDs), the tIRA WD form asks for how much tax to withhold, and the IRA provider sends in that tax. THE IRS VIEWS THAT WITHHOLDING AS THOUGH IT WAS PAID ON TIME, so you can pay 12 months of your estimated income tax with a December tIRA withdrawal if the WD is large enough. Note that RMDs have to be completed by Dec 31 even though the withholding tax is not due until Jan 15.

The penalty for late tax payments is just the back interest on the amount that is late. There is not a fine on top of the back interest, so don't stress if you are ever late paying your estimated taxes. The interest rate is low.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by livesoft » Sun Sep 06, 2015 6:18 am

malloc wrote:Method One: Take it in December so that the money is exposed to the market for the maximum amount of time, before withdrawal and taxes.
Take in January and invest it, so that the money is exposed to the market for the maximum amount of time AND gets a lower tax rate than if it was kept in the IRA.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by JW-Retired » Sun Sep 06, 2015 7:47 am

livesoft wrote:
malloc wrote:Method One: Take it in December so that the money is exposed to the market for the maximum amount of time, before withdrawal and taxes.
Take in January and invest it, so that the money is exposed to the market for the maximum amount of time AND gets a lower tax rate than if it was kept in the IRA.
Yes. Also it gets invested at your stock heavier taxable account AA.

I do it the first week of the year. Gives me a guarantee I won't find I need to take out much more than my RMD percentage late in the year, like would have happened in December 2008. One less thing to think about all year.

I realize that the IRS gets it's taxes earlier but it's not like that float amounts to much.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by grabiner » Sun Sep 06, 2015 10:13 am

malloc wrote:RMD is forced in December, if not taken earlier.

Method One: Take it in December so that the money is exposed to the market for the maximum amount of time, before withdrawal and taxes.

Method Two: Take monthly withdrawals so that you are not exposed to a market downturn in the latter part of the year.

I had assumed that method one was superior, but now I am having second thoughts. I am considering the question in general, not just this year.
Market exposure is independent of the account, since you can hold any fund in either an IRA or a taxable account. If you have an RMD you do not need to spend, you can take the RMD from a stock fund in your IRA in December and invest it in a taxable stock fund. If you do not want the risk of the stock market on the amount you will take on an RMD, you can put the money in a bond fund inside your IRA and leave it there until you take the RMD in December.

If you are paying 25% tax on the RMD, you can view this as the IRS already owning 25% of the IRA; withdraw $20,000 from the IRA, have $5000 withheld to pay the tax, and invest the other $15,000 in a similar taxable fund. You'll still come out ahead by deferring taxes on distributions made during the year.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by CABob » Sun Sep 06, 2015 10:23 am

After reading a number of the responses above I am having some second thoughts about my personal preference of taking the RMD late in the year. My argument for keeping the tax deferral of the IRD for as long as possible is perhaps offset by an early in the year transfer of assets from the tax inefficient (bond heavy) account into a more efficient equity heavy taxable account. I still like the idea of withholding taxes late in the year so perhaps I can combine the two ideas. Since the RMD amount is determined from the prior year-end balance the amount can be determined early in the year. The amount of tax I will want withheld can also be determined fairly early based on the prior year’s tax return.
So, why don’t I take the big portion of the RMD that is going into my taxable account early in the year and the portion to go to the IRS late in the year? If either or both of these withdrawals throws my AA off, I can always rebalance within the IRA. Any thoughts, pro or con?
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by livesoft » Sun Sep 06, 2015 10:27 am

Can one change tax withholding, so 0% for first withdrawal in January and 100% for 2nd withdrawal in December?
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by JW-Retired » Sun Sep 06, 2015 10:39 am

Grabiner wrote:Market exposure is independent of the account, since you can hold any fund in either an IRA or a taxable account.
Not true for me since I have all my bonds in tax deferred and it's all stocks in taxable.

I take my RMD proportionally over the IRA assets and what I don't spend I invest in equities in taxable. No shifting of assets around needed in either account.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by CABob » Sun Sep 06, 2015 10:47 am

livesoft wrote:Can one change tax withholding, so 0% for first withdrawal in January and 100% for 2nd withdrawal in December?
I think it would have to be manually with two requests for the RMD, but I think it would be allowed.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by Kevin M » Sun Sep 06, 2015 11:41 am

JW Nearly Retired wrote:
Grabiner wrote:Market exposure is independent of the account, since you can hold any fund in either an IRA or a taxable account.
Not true for me since I have all my bonds in tax deferred and it's all stocks in taxable.

I take my RMD proportionally over the IRA assets and what I don't spend I invest in equities in taxable. No shifting of assets around needed in either account.
JW
David was assuming you don't change your AA (market exposure). If you sell bonds in the IRA and buy stocks in taxable, you are changing your AA to a riskier portfolio, and increasing your market exposure for stocks.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by JW-Retired » Sun Sep 06, 2015 12:00 pm

Kevin M wrote: David was assuming you don't change your AA (market exposure). If you sell bonds in the IRA and buy stocks in taxable, you are changing your AA to a riskier portfolio, and increasing your market exposure for stocks.

Kevin
Yes, but after taxes and gifting some of the RMD, it's a really tiny overall AA change in one year. Very slightly more frequent rebalancing takes care of it.

Years are passing without a need for us to rebalance. Last time was Dec 2013.
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Re: Strategies for RMDs

Post by Watty » Sun Sep 06, 2015 1:13 pm

livesoft wrote:Method Three: Take it January so you don't forget about it and if you die that year your heirs don't have to deal with it.
+1

Even better have it set up so that it is automatically done by the IRA custodian since eventually your finances will become harder to manage as you age. When you are doing your taxes by April(or whoever does them for you if you are not able) then the RMD can be checked to see if they happened correctly.

Another advantage of this is that if the investments in the taxable account do drop after you buy them, then you can sell them before the end of the year and take a capital loss that can offset up to $3,000 of ordinary income.

If the investments go up in value, and you never need them, then your estate will eventually get the extra years growth at the stepped up cost basis and not have to pay capital gains taxes on them.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by Independent » Sun Sep 06, 2015 1:58 pm

livesoft wrote:Can one change tax withholding, so 0% for first withdrawal in January and 100% for 2nd withdrawal in December?
Every time I've requested an IRA distribution, I've filled out a form that includes a question on tax withholding. I vary the percent during the year as my projections of my final taxes change.

I suppose some people set up automatic monthly withdrawals, I do less frequent and larger amounts "as needed".

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by malloc » Sun Sep 06, 2015 4:48 pm

An idea occurs to me that I had overlooked before.

I have income which has no "built in" withholding (real estate), and I am not fond of the IRS forcing me to make installment payments.

I can wait until late in the year, when taxes are clearer, and than over withhold from RMD to compensate. This allows me to not bother with calculations throughout the year, and just adjust withholding at the end of the year.

Sounds good I think

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by billfromct » Sun Sep 06, 2015 6:59 pm

When I retire, I will:

-have 5-7 years of estimated annual taxable IRA distributions (my taxable retirement assets/my life expectancy) in a short term bond fund (recalculate each year dependent on taxable retirement asset value as well as life expectancy)
-have my RMD distributed in January of each year (as others have mentioned to ensure my annual RMD is executed each year should I die)
-have my estimated Federal & state taxes withheld to simplify things should I die (I know I'm giving the government an interest free loan but with 1% savings account interest rates, this is the price of simplification)
-place my after tax IRA distribution in a high % savings account
-transfer 1/12 of my after tax IRA distribution from my high % savings account to my checking account each month
-spend my monthly distribution without any regrets
-adjust for unforseen circumstances

bill

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by DonCamillo » Sun Sep 06, 2015 7:53 pm

I like to do a Roth Conversion as early in the year as possible.

But, if you are over 70 1/2, the first withdrawal from your IRA is required to be your RMD.

So I take the RMD on the first business day of the year and then do the Roth Conversion on the day that I get confirmation of the RMD.

If, toward the end of the year, I discover that I still have some room in the current tax bracket and can avoid the Medicare MAGI, I can convert more of my IRA to the Roth.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by SamB » Sun Sep 06, 2015 8:40 pm

I have not started RMD's yet, but I must start in 2017. The first thing I did was set up a spreadsheet to see what happens with taxes, and reinvestment relative to the balance over time. I suggest that you do this. The biggest variable is the rate of return on the remaining balance. In fact, it matters little whether you spend the entire distribution or reinvest the net or a portion of the net after taxes. If you are worried about maxing things out when you are 115 years old, then go ahead and waste your time with some kind of optimum annual withdrawal strategy.

Of course if you take much larger distributions, that is a different story.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by ryman554 » Tue Sep 08, 2015 10:01 am

Another one for January 1, at whatever withholding rate my marginal tax rate is.

I've seen arguments that you want the IRA to grow as large as possible before taking RMD -- why else would folks wait until December? But all that is doing in making RMD larger the next year. Remember, withdrawing from the tiRA does not mean that money is out of the market. Just move it to a taxable account. Once you hit RMD, shouldn't it be the goal to get the tIRA as *small as possible*?

To me there are three ways to do this:
1. Assume market, on average, always rises, so take it out Jan 1.
2. Market time a bit and take the RMD on the dip. (that was kind of OP option #2!)
3. Remove more than RMD / convert to ROTH post-RMD (requires #1/#2 to be early in year) up to your marginal tax rate.
4. Donate to charity (Not familiar with this option)

Deferring tax is great. In retirement, and especially in legacy planning, that tIRA is the worst of all choices from a tax perspective, particularly if you have pension / SS income.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by mickeyd » Tue Sep 08, 2015 11:29 am

But all that is doing in making RMD larger the next year.
How so?
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by House Blend » Tue Sep 08, 2015 11:42 am

ryman554 wrote:Once you hit RMD, shouldn't it be the goal to get the tIRA as *small as possible*?
No. The goal should be to have as much after tax money as possible.

If you pay the same tax rate X on every RMD dollar now and forever, then you want your tIRA to be large, not small. Since the government owns X% of the account, it is equivalent to a Roth that is X% smaller, and the only reason it is worse than a real Roth (in this constant tax rate scenario) is that you are forced to take distributions from it. Now explain to me why you'd want it to be smaller.

If you know the rates you'll pay on each RMD dollar now and forever, and they vary, then there may be some tiny advantages to be gained by timing your RMDs. (And often, getting them smaller is exactly the opposite of what you should be doing.) Don't waste a second thinking about the timing until you've thoroughly analyzed whether you should be doing Roth conversions, and whether you can improve your tax-efficiency by adjusting asset locations. Both are far more important for maximizing after tax dollars than when you take your RMD.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by David Jay » Tue Sep 08, 2015 11:53 am

mickeyd wrote:
But all that is doing in making RMD larger the next year.
How so?
Speaking for myself (not ryman), I believe the explanation to be that more growth (interest, dividends, asset values) during the 11 months will leave more money in the tIRA at the end of the year. More money in tIRA means a bigger RMD next year as the RMD percentage is fixed by law.
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by bsteiner » Tue Sep 08, 2015 2:27 pm

The benefit of waiting until the end of the year (or as close to the end of the year as you can without risking not taking the distribution by year-end) to take the required distribution is that you have more money in IRA for a longer period of time. Remember that a traditional IRA is effectively part the government's (the tax rate), and part yours (1 minus the tax rate), and that the income and gains on your part are tax-free.

If you take the required distribution at the beginning of the year, then the income and gains during the year on that distribution will be taxable.

However, the difference may not be substantial. Also, many people use their required distributions for living expenses, so they may find it convenient to take it in installments during the year.

There are also a couple of countervailing factors. In the year of death, if you're in a state that has a state estate tax, there's a double tax on the required distribution not yet taken, since there's no income tax deduction for state estate taxes. Also, if your beneficiaries don't take the distribution by year-end, they'll have to apply for a waiver of the 50% excise tax (though the IRS would almost certainly grant the waiver).

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by ryman554 » Tue Sep 08, 2015 2:55 pm

House Blend wrote:
ryman554 wrote:Once you hit RMD, shouldn't it be the goal to get the tIRA as *small as possible*?
No. The goal should be to have as much after tax money as possible.

If you pay the same tax rate X on every RMD dollar now and forever, then you want your tIRA to be large, not small. Since the government owns X% of the account, it is equivalent to a Roth that is X% smaller, and the only reason it is worse than a real Roth (in this constant tax rate scenario) is that you are forced to take distributions from it. Now explain to me why you'd want it to be smaller.
Sure, lets take this further.
100k in IRA, 10k RMD, 15k tax bracket for simplicity, 10% growth

1. jan 1 RMD = 100k in IRA, 10k RMD
90k left in IRA, 8.5k in taxable.
grows to 99k in IRA and 9.35k in taxable
2. dec31 RMD = 110k in IRA, 10k RMD.
100k left in IRA, 8.5k in taxable

For the case #1
My "effective" after tax moneys = 99k *0.85 + 9.35k = 93.5k
For the case #2
My "effective" after tax moneys = 100k *0.85 + 8.5k = 93.5k

So, they are the same. Great. This is tax neutral. Next year, however, I am forced to take RMD and marginal rate of taxes on 1k less, while the (larger) taxable account grows with *no* tax consequences.

1. jan 1 RMD = 99k in IRA, 10k RMD
89k left in IRA, 17.85k in taxable.
grows to 97.9k in IRA and 19.635k in taxable
2. dec31 RMD = 110k in IRA, 10k RMD.
100k left in IRA, 17.85k in taxable

For the case #1
My "effective" after tax moneys = 97.9k *0.85 + 19.635k = 102.58k
For the case #2
My "effective" after tax moneys = 100k *0.85 + 17.85k = 102.85k

Hm. Looks like I am wrong(!). You are better off waiting to take the tax out by a llittle bit. This also assumes tax efficency in the taxable account, so the results will be even more in the hold in tIRA camp. Hm.

Obviously, this same argument holds for extra withdrawals for ROTH conversions as well.

If you need to use the RMD to live, then we aren't having this discussion at all. Not sure if it's best to stagger or wait...

***
Now ask yourself: For yourself or for your heirs?

There is no question that your heirs want you to deplete the tIRA in favor of ROTH or taxable. That step-up in basis is hard to ignore, and CG rates for the heirs is much better than marginal rates.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by bsteiner » Tue Sep 08, 2015 4:05 pm

ryman554 wrote:... There is no question that your heirs want you to deplete the tIRA in favor of ROTH or taxable. That step-up in basis is hard to ignore, and CG rates for the heirs is much better than marginal rates.
I agree as to the Roth conversion, assuming you can convert at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply to the distributions.

I don't agree as to the taxable account. The only way to move money from a traditional IRA to a taxable account is to withdraw it and pay the tax. That terminates the tax benefit of having money in the IRA. At a constant tax rate, and ignoring Roth conversions, you'd want to keep as much money in your IRA as long as possible.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by Artsdoctor » Tue Sep 08, 2015 4:22 pm

Malloc,

Your original question is a testament to the vast number of choices you have, and it's also all very dependent on the individual. Not only is it independent on the individual situation, but it's dependent on that particular year.

First rule: never, ever do anything that could jeopardize taking your RMD in the year that is required. That's a huge penalty and it's to be avoided. Consequently, taking an RMD on December 31 is just crazy--there's too much room for error.

Everything else is open for negotiation:

What exactly is in that IRA? Maybe your CD has a maturity date in October so a November 15 RMD works perfectly.

How important is that RMD? If you need that RMD and have very little cushion except for social security, you may need to take it earlier rather than later.

Does it make up 90% of your living expenses or 10%? If the majority of your assets are in your taxable account and the RMD is small, you might even use it to pay just taxes for the year. If that's the case, take it later in the year.

How important is it to you to make your tax payments once yearly or do you actually like making quarterly payments? It's extremely attractive to make one tax payment late in the year and forgo quarterly payments without penalty. You're essentially getting an interest-free loan from the government.

What's your health like? What are mental capacities? If these are iffy, earlier in the year is better. Get it over, have them take a percentage out, and then you don't have to worry about it.

And just because you choose November 15 one year doesn't mean you can't do it January 15 the next year. There's tremendous flexibility.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by Watty » Tue Sep 08, 2015 4:58 pm

ryman554 wrote:Hm. Looks like I am wrong(!). You are better off waiting to take the tax out by a llittle bit.

Except in years when the stock market goes down. The problem then is;

1) If you took the RMD early in the year you could sell the investment in the taxable account and get the capital loss.

2) If you took it late in the year and the market declined by 10%, then you would have $90K in the IRA and but still have to withdrawal the required $10K and be left with only $80K in the IRA so you would lose some of that tax advantaged space.

I don't see any compelling financial advantage one way or the other since the details will vary from year to year.

The big advantage of doing it late in the year is that you can do your tax withholding then if you want to avoid filing estimated taxes. If you do the RMD early in the year you can do enough withholding to qualify for the safe harbor rule so

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by JW-Retired » Wed Sep 09, 2015 8:27 am

ryman554 wrote:
House Blend wrote:
ryman554 wrote:Once you hit RMD, shouldn't it be the goal to get the tIRA as *small as possible*?
No. The goal should be to have as much after tax money as possible.
.....snip
Sure, lets take this further.
100k in IRA, 10k RMD, 15k tax bracket for simplicity, 10% growth

1. jan 1 RMD = 100k in IRA, 10k RMD
90k left in IRA, 8.5k in taxable.
grows to 99k in IRA and 9.35k in taxable
2. dec31 RMD = 110k in IRA, 10k RMD.
100k left in IRA, 8.5k in taxable

For the case #1
My "effective" after tax moneys = 99k *0.85 + 9.35k = 93.5k
For the case #2
My "effective" after tax moneys = 100k *0.85 + 8.5k = 93.5k

So, they are the same. Great. This is tax neutral. Next year, however, I am forced to take RMD and marginal rate of taxes on 1k less, while the (larger) taxable account grows with *no* tax consequences.

1. jan 1 RMD = 99k in IRA, 10k RMD
89k left in IRA, 17.85k in taxable.
grows to 97.9k in IRA and 19.635k in taxable
2. dec31 RMD = 110k in IRA, 10k RMD.
100k left in IRA, 17.85k in taxable

For the case #1
My "effective" after tax moneys = 97.9k *0.85 + 19.635k = 102.58k
For the case #2
My "effective" after tax moneys = 100k *0.85 + 17.85k = 102.85k

Hm. Looks like I am wrong(!). You are better off waiting to take the tax out by a little bit. This also assumes tax efficiency in the taxable account, so the results will be even more in the hold in tIRA camp. Hm.
Ryman554,
I take my RMD early. I think/hope maybe you are not wrong if one uses more realistic tax rates and AA's for each account. Trying something closer to my own case......

IRA account 60% bonds, taxable all stocks.
100k in IRA AA=40/60, 10k RMD, 25% tax bracket, 10% stocks return/3% bonds return (IRA overall 5.8%)
taxable account AA = 100/0, earnings taxed at 15%.

1. jan 1 RMD = 100k in IRA, 10k RMD
90k left in IRA, 7.5k in taxable after tax
grows to 95.22k in IRA and 8.25k in taxable, total= $103.47k, after tax value = 0.75(95.22)+8.25-0.15(0.75)= $79.55k

2. dec31 RMD = 105.8k in IRA, 10k RMD.
95.8k left in IRA, 7.5k in taxable, total = $103.3k, after tax value = 0.75(95.8)+7.5= $79.35k

Tiny $200 advantage to January 1 RMDs. So, if no errors here, in this case appears you and I were (very slightly) not wrong.
JW
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Re: Strategies for RMDs [Required Minimum Distributions]

Post by ryman554 » Wed Sep 09, 2015 8:48 am

bsteiner wrote:
ryman554 wrote:... There is no question that your heirs want you to deplete the tIRA in favor of ROTH or taxable. That step-up in basis is hard to ignore, and CG rates for the heirs is much better than marginal rates.
I agree as to the Roth conversion, assuming you can convert at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply to the distributions.

I don't agree as to the taxable account. The only way to move money from a traditional IRA to a taxable account is to withdraw it and pay the tax. That terminates the tax benefit of having money in the IRA. At a constant tax rate, and ignoring Roth conversions, you'd want to keep as much money in your IRA as long as possible.
Agreed on the "sensibility" of removing tIRA and tax bracket issues.

I agree that ROTH is better than taxable, always, as long as you can take $$ out of it. In retirement, however, where is the tax benefit to tIRAs, really? From my view, the tIRA is the *most expensive* kind of $$ to hold in retirement, as taxes are due, in full, upon any withdrawal. In both cases you listed above (ROTH conversion, taxable), you have to pay the tax to get the money out of the tIRA. So that's a wash, and we're talking about gains only.

Assuming a 15% bracket, then the LTCG rate is 0%. I guess there is the added SS tax, and state stuff which adds up which creates a tax drag... and I guess the computations do indicate that the tax drag slightly favors the tira over time vs. taxable.

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Re: Strategies for RMDs [Required Minimum Distributions]

Post by House Blend » Wed Sep 09, 2015 11:09 am

JW Nearly Retired wrote:IRA account 60% bonds, taxable all stocks.
100k in IRA AA=40/60, 10k RMD, 25% tax bracket, 10% stocks return/3% bonds return (IRA overall 5.8%)
taxable account AA = 100/0, earnings taxed at 15%.

1. jan 1 RMD = 100k in IRA, 10k RMD
90k left in IRA, 7.5k in taxable after tax
grows to 95.22k in IRA and 8.25k in taxable, total= $103.47k, after tax value = 0.75(95.22)+8.25-0.15(0.75)= $79.55k

2. dec31 RMD = 105.8k in IRA, 10k RMD.
95.8k left in IRA, 7.5k in taxable, total = $103.3k, after tax value = 0.75(95.8)+7.5= $79.35k

Tiny $200 advantage to January 1 RMDs. So, if no errors here, in this case appears you and I were (very slightly) not wrong.
Before declaring a winner, you should control for risk.

That is, you should have the same percentage of after tax dollars in bonds vs. stocks before and after the RMD.

Of course this requires some sort of global AA, so I will throw in some additional arbitrary assumptions in red, and use a discount of 15% on unrealized gains when measuring after tax value in taxable:

$60K bonds in tIRA, $40K stocks in tIRA,
$100K stocks in taxable with a cost basis of $50K.
So the after tax value is $75K + $92.5K = $167,500.
Apparently, the desired AA is 0.75*60/167.50 = 26.86% bonds.

Also, one should account for the tax costs of dividends in taxable. For a qualifed dividend of 2% taxed at 15%, a rough approximation is that a 10% nominal return produces only 9.7% in taxable.

1. Take the $10K RMD on Jan 1.
You have $90K in the tIRA, and $107.5K stocks in taxable, basis $57.5K.
To maintain the same tax-adjusted AA, you should have taken 100% of the
RMD from the stocks, so the tIRA is now $60K bonds + $30K stocks.

After one year, the tIRA is worth $61.8K + $33K = $94.8K.
Taxable received $2,150 in dividends, of which $323 is lost to taxes,
so taxable is 1.10*$107500 - $323 = $117,927 with cost basis $59,327.
(The basis is higher due to reinvesting the net $1827 dividend.)
After tax value is: 0.75*94800 + 0.85*117927 + 0.15*59327 = $180,237.
Of course you also need to rebalance, but that doesn't change the value.

2. Take the $10K RMD on Dec 31.
After one year, the tIRA is worth $61.8K + $44K - $10K RMD = $95.8K.
Taxable received $2000 in dividends, less $300 in taxes.
So taxable is 1.10*$100K + $7.5K - $300 = $117.2K with basis $59.2K.
After tax value is: 0.75*95800 + 0.85*117200 + 0.15*59200 = $180,350.

Late RMD wins by $113 with these assumptions.

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