2017 RMD Timing

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tomd37
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2017 RMD Timing

Post by tomd37 » Sat Jul 15, 2017 7:03 pm

For the past ten years I have taken our RMDs later in the year around October or November after having taken my QCDs, when available, and have never given the RMD timing too much thought. As we continue through this extended bull market I am thinking about and questioning the timing of the RMDs this year.

My asset allocation is 40/60 stock/bond and only two funds are involved; Vanguard Total Stock Market Index (VTSAX) and Vanguard Intermediate-Term Bond Index (VBILX). Some of the RMD is not needed and usually gets reinvested in a taxable investment account using VTSAX. My personal choice at age eighty is not to bother with international investing.

As we go into the second half of the year I am beginning to ponder the timing of the RMD and whether or not it might make any difference if I take it sooner rather that later or vice versa. Would anyone care to offer their thoughts and reasoning on this matter?
Tom D.

mhalley
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Re: 2017 RMD Timing

Post by mhalley » Sat Jul 15, 2017 7:06 pm

One advantage of later rmds is being able to avoid paying estimated taxes. You could always lock in gains by selling whatever your rmds would be and keeping it in the mm until you make the rmds. If you don't care about taxes and you are just selling in ira and rebuying in taxable it doesn't really matter.
Let me think of some things that could happen:
You take rmd now, and invest it in taxable account. Stock market goes down, you can tax loss harvest. :annoyed
You take rmd now and invest, stock market goes up. :D
You sell now and leave in ira, stock market goes down, you take rmd and buy in taxable at lower price. :beer
You sell now and stock market goes up, then you take rmd and buy at higher price. :annoyed
Last edited by mhalley on Sat Jul 15, 2017 7:12 pm, edited 1 time in total.

Uniballer
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Re: 2017 RMD Timing

Post by Uniballer » Sat Jul 15, 2017 7:12 pm

If the markets stay up then taking the RMD as late as possible makes the most sense because you will be removing a smaller percentage of the total account value, and leaving a greater percentage invested for growth.

If the markets suffer a serious decline before you take your RMD then you will be removing a greater percentage of whatever is left.

My parents take their RMDs late in October because of the timing of payments they owe. Since nobody knows nothing I don't even raise the issue. They are already paying estimated taxes anyway because their earned income is not very much (barely enough to max their Roths), and they have several other income sources besides SS.
Last edited by Uniballer on Sat Jul 15, 2017 7:15 pm, edited 1 time in total.

sport
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Re: 2017 RMD Timing

Post by sport » Sat Jul 15, 2017 7:15 pm

I planned to take my RMD from a bond fund this year. Early in the year, it seemed that interest rates might rise and therefore, the bond fund might drop. To keep this from affecting my RMD this year, I moved an amount equal to the RMD into Vanguard Ultra Short Term Bond fund. It yields a little more than a MM fund, while not having too much interest rate risk. This keeps the money in my IRA for making QCD donations. When I get closer to the end of the year, I will withdraw whatever remains, and have the necessary income taxes withheld from that withdrawal.

tomd37
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Re: 2017 RMD Timing

Post by tomd37 » Sat Jul 15, 2017 7:16 pm

My income is quite predictable and therefore I use the RMD to withhold the remaining amount of federal tax that will be needed to bring my balance due to as near zero as possible. I have not touched my federal withholding amounts on my pension and social security since RMDs started. Have come as close as ten dollars federal tax due in some years.
Tom D.

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Re: 2017 RMD Timing

Post by WoodSpinner » Sat Jul 15, 2017 8:00 pm

tomd37 wrote:For the past ten years I have taken our RMDs later in the year around October or November after having taken my QCDs, when available, and have never given the RMD timing too much thought. As we continue through this extended bull market I am thinking about and questioning the timing of the RMDs this year.

My asset allocation is 40/60 stock/bond and only two funds are involved; Vanguard Total Stock Market Index (VTSAX) and Vanguard Intermediate-Term Bond Index (VBILX). Some of the RMD is not needed and usually gets reinvested in a taxable investment account using VTSAX. My personal choice at age eighty is not to bother with international investing.

As we go into the second half of the year I am beginning to ponder the timing of the RMD and whether or not it might make any difference if I take it sooner rather that later or vice versa. Would anyone care to offer their thoughts and reasoning on this matter?
I would consider doing an In-Kind Distribution and move your RMD to Your Taxable account. Sell the VTSAX that you don't need for living expenses and lock in your profit. The remainder should be able to just grow using the stepped-up basis.

Thoughts 8-)

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BL
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Re: 2017 RMD Timing

Post by BL » Sat Jul 15, 2017 9:17 pm

I don't disagree with most of the suggestions. However I keep in mind that if I die in December and haven't completed the RMD, it doesn't leave much time for heirs to take my RMD and it could get forgotten. So it may simplify things for heirs to have it done earlier in the year. I don't think it is critical and have only done 1/2 of QCDs so far this year. I suppose the odds are it may increase in value during the year which would suggest waiting as long as possible.

Just pick what works for you.

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joe8d
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Re: 2017 RMD Timing

Post by joe8d » Sat Jul 15, 2017 11:38 pm

Always take RMD on 1st Q TSM reinvest date and that what I do with it.
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Dandy
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Re: 2017 RMD Timing

Post by Dandy » Sun Jul 16, 2017 7:56 am

Most financial reasons favor delaying RMDs to later in the year since markets usually go up and you would earn more on the RMD amount prior to withdrawal. Of course if the market goes down that plan for that year doesn't create a benefit.

I face my first RMD next year. I am not worried about estimated tax filing related to it because I intend to have withholding taken out at the time of withdrawal. I am fortunate because I don't think I will need much the RMDs to support our current lifestyle (one of the benefits of waiting to age 70 to take my SS).

I toyed with monthly withdrawals but thought that would be too much activity. Quarterly seemed much better (jan, apr, jul, oct). That seemed to be the plan and I was at peace.

Then we decided to gift much of it to our children so now I plan to take it all in early January. So, with this plan I will have withholding done, take our needed sum for yearly expenses off the top and then gift the rest. I feel my children will enjoy getting the money early in the year rather than a nice holiday gift in December. A very minor benefit is that the RMD will be done for the year. Should illness or death occur my spouse or heirs won't have to worry about whether or not it was taken. I understand that the IRS might be understanding and not impose a penalty but why have any worry or hassle.

MN Finance
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Re: 2017 RMD Timing

Post by MN Finance » Sun Jul 16, 2017 8:11 am

There's no reason your investment allocation and RMD timing need to be linked. If you want to change your investments, then do that. If you want to delay your RMD then do that

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Re: 2017 RMD Timing

Post by minesweep » Sun Jul 16, 2017 9:54 am

BL wrote:I don't disagree with most of the suggestions. However I keep in mind that if I die in December and haven't completed the RMD, it doesn't leave much time for heirs to take my RMD and it could get forgotten. So it may simplify things for heirs to have it done earlier in the year. I don't think it is critical and have only done 1/2 of QCDs so far this year. I suppose the odds are it may increase in value during the year which would suggest waiting as long as possible.

Just pick what works for you.
I use Vanguard’s RMD service so if I die in December the distribution will occur automatically (no need for my heirs to worry about doing it).

I take my RMD mid-December and have my total estimated tax for the year taken at that time (using the safe harbor rule from my prior year’s tax). I prefer not to pay any taxes to the IRS until it’s necessary. Delaying the tax payment (until December) will allow me to earn additional interest throughout the year on the RMD amount. My IRA is 100% bonds (74% taxable, 23% IRA, 3% Roth). Granted a bond fund could drop in value by waiting until December but generally bonds don’t move up or down in value as much as stocks do.

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Re: 2017 RMD Timing

Post by friar1610 » Sun Jul 16, 2017 1:10 pm

I'm not smart enough to figure out all the nuances and I have had things organized (even before my wife and I started RMDs) so there are no estimated tax payments needed. So my wife and I each take our RMDs 2x per year. We have our payment months staggered so there is a quarterly incoming payment. We have VG deduct Fed and state taxes. What's left goes into a joint taxable VG fund. I could maybe squeeze a little more out of this with a different approach but this works and it's simple.
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Re: 2017 RMD Timing

Post by Swansea » Sun Jul 16, 2017 1:21 pm

I start my RMDs next year. I will adjust the withholding from my pension to compensate for the extra taxes.

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Re: 2017 RMD Timing

Post by kaneohe » Sun Jul 16, 2017 1:51 pm

Dandy wrote:Most financial reasons favor delaying RMDs to later in the year since markets usually go up and you would earn more on the RMD amount prior to withdrawal. ..........
Suppose you don't need the RMD to live on and are going to reinvest in the same fund. When you take it out after reinvesting, any gains become LTCG if held long enough vs ordinary income from the IRA. How does that affect things?

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celia
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Re: 2017 RMD Timing

Post by celia » Sun Jul 16, 2017 2:14 pm

For me, it depends on if you want to draw down the account fast or make it last. DH has an Inherited traditional IRA and Inherited Roth IRA and needs to take RMDs from both each year. Since we want to get rid of the tax-deferred accounts before we start SS (since RMDs will push us into a higher tax bracket), I take out more than just the RMD from the traditional IRA when share prices are down, so more shares can be removed for the same amount of taxes. Conversely, I want to stretch out the Roth for as long as possible (so the gains can be tax-free). There, I wait until share prices are higher, so fewer shares come out. I usually don't withdraw in January or December, but when I see a downward or upward trend in the markets, I get ready. Yes, I market time somewhat, but am always looking at the tax implications. Of course, I don't get the highest and lowest days of the year, but at least I get better than a "random" day.

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celia
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Re: 2017 RMD Timing

Post by celia » Sun Jul 16, 2017 2:25 pm

kaneohe wrote:
Dandy wrote:Most financial reasons favor delaying RMDs to later in the year since markets usually go up and you would earn more on the RMD amount prior to withdrawal. ..........
Suppose you don't need the RMD to live on and are going to reinvest in the same fund. When you take it out after reinvesting, any gains become LTCG if held long enough vs ordinary income from the IRA. How does that affect things?
First, there is no need so sell, take RMD, and re-purchase. You can take the RMDs in-kind (remove shares). In taxable, the basis is the value on the day the RMD is taken. And you will earn the same amount on the RMD whether it stays in the IRA or goes to taxable, assuming you don't withhold taxes from the RMD.

LTCG in taxable are taxed favorably but are taxed as ordinary income when withdrawn from the IRA. (Technically, capital gains don't exist in IRAs. Every dollar is taxed the same.) And if you never sell the investment the RMD is in, it gets a stepped-up value at death (not taxed).

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Re: 2017 RMD Timing

Post by tomd37 » Sun Jul 16, 2017 2:36 pm

OP here - We are getting some informative and thoughtful responses to the original post and I'm glad I at least brought up the subject. :idea:
Tom D.

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Re: 2017 RMD Timing

Post by mickeyd » Sun Jul 16, 2017 4:37 pm

Been taking RMD for a few years and generally think that taking it in December is best. Last year about this time the equity market was near the all-time high so I decided to take 50% of my RMD and 50% later on. Later on TSM price was still higher. This year (now) S&P500 is again at all-time high. I'm considering the same strategy this year.

I assume that in the long run it will make little difference unless there is a drastic move in the markets.
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friar1610
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Re: 2017 RMD Timing

Post by friar1610 » Sun Jul 16, 2017 4:40 pm

celia wrote:
kaneohe wrote:
Dandy wrote:Most financial reasons favor delaying RMDs to later in the year since markets usually go up and you would earn more on the RMD amount prior to withdrawal. ..........
Suppose you don't need the RMD to live on and are going to reinvest in the same fund. When you take it out after reinvesting, any gains become LTCG if held long enough vs ordinary income from the IRA. How does that affect things?
First, there is no need so sell, take RMD, and re-purchase. You can take the RMDs in-kind (remove shares). In taxable, the basis is the value on the day the RMD is taken. And you will earn the same amount on the RMD whether it stays in the IRA or goes to taxable, assuming you don't withhold taxes from the RMD.
Just trying to understand the strategy here. How does this differ from selling the shares in the IRA, not having taxes deducted, and buying shares of the same fund the same day?

In either case, of course, taxes are due on the RMD and the money has to come from somewhere.
LTCG in taxable are taxed favorably but are taxed as ordinary income when withdrawn from the IRA. (Technically, capital gains don't exist in IRAs. Every dollar is taxed the same.) And if you never sell the investment the RMD is in, it gets a stepped-up value at death (not taxed).
Again, I don't really understand how this differs from the tax treatment if you sell and rebuy - can you elaborate?

Thank you.
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kaneohe
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Re: 2017 RMD Timing

Post by kaneohe » Sun Jul 16, 2017 5:31 pm

celia wrote:
kaneohe wrote:
Dandy wrote:Most financial reasons favor delaying RMDs to later in the year since markets usually go up and you would earn more on the RMD amount prior to withdrawal. ..........
Suppose you don't need the RMD to live on and are going to reinvest in the same fund. When you take it out after reinvesting, any gains become LTCG if held long enough vs ordinary income from the IRA. How does that affect things?
First, there is no need so sell, take RMD, and re-purchase. You can take the RMDs in-kind (remove shares). In taxable, the basis is the value on the day the RMD is taken. And you will earn the same amount on the RMD whether it stays in the IRA or goes to taxable, assuming you don't withhold taxes from the RMD.

LTCG in taxable are taxed favorably but are taxed as ordinary income when withdrawn from the IRA. (Technically, capital gains don't exist in IRAs. Every dollar is taxed the same.) And if you never sell the investment the RMD is in, it gets a stepped-up value at death (not taxed).
Would one therefore conclude that if you are not consuming the RMD but reinvesting in taxable that the tax advantages of shifting from ordinary income to LTCG (or from LTCG to stepped up basis w/ tax of 0) that removing from TIRA ASAP during the yr. would be more favorable?

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House Blend
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Re: 2017 RMD Timing

Post by House Blend » Sun Jul 16, 2017 6:19 pm

friar1610 wrote:
celia wrote:First, there is no need so sell, take RMD, and re-purchase. You can take the RMDs in-kind (remove shares). In taxable, the basis is the value on the day the RMD is taken. And you will earn the same amount on the RMD whether it stays in the IRA or goes to taxable, assuming you don't withhold taxes from the RMD.
Just trying to understand the strategy here. How does this differ from selling the shares in the IRA, not having taxes deducted, and buying shares of the same fund the same day?
For someone trying to meet an RMD, an in-kind transfer is a disadvantage.

You don't know the exact price the transfer will execute at, so you don't know how many shares to transfer. And if it's an ETF, you're also limited to whole numbers of shares. So you have to put in a margin of safety, or might need a second transaction.

For mutual funds at least, it is much simpler to exchange $12,345.67 from Fund X in IRA to Fund X in taxable. You'll own exactly the same number of shares before and after. (If no tax is withheld.)

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House Blend
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Re: 2017 RMD Timing

Post by House Blend » Sun Jul 16, 2017 7:10 pm

kaneohe wrote:
Dandy wrote:Most financial reasons favor delaying RMDs to later in the year since markets usually go up and you would earn more on the RMD amount prior to withdrawal. ..........
Suppose you don't need the RMD to live on and are going to reinvest in the same fund. When you take it out after reinvesting, any gains become LTCG if held long enough vs ordinary income from the IRA. How does that affect things?
1. A potential disadvantage for taking the RMD early is that more time spent in taxable means more potential tax leakage from dividends.

2. There's a bit of deception involved if you think that moving dollars from Fund X in an IRA to Fund X in taxable early in the year has the potential to replace ordinary tax rates with (future, lower) LTCG taxes. That's a distraction from what's really going on, which is the usual potential for gaining advantage from delaying *tax payments* as long as possible (assuming a rising market).

I think it is easiest to see this with an exaggeration. Imagine a simplified tax world in which every dollar taken from tax-deferred is taxed 25%, every LTCG dollar is taxed 15%, and the IRS is very relaxed to the point that they let you postpone tax payments for 10 years.

Now consider the consequences of taking $100K out of your trad IRA and reinvesting it in taxable. (Not needed for expenses.) The tax bill is $25K, but you have 10 years to pay it. As luck would have it, your $100K grows to $200K after 10 years, so you are happy to cash it out, leaving $160K after paying the bill and the cap gains taxes. (Never mind that you've paid the cap gains taxes 10 years early.) On the other hand, if you paid the tax bill at the time of distribution, you'd have only $75K to invest, and it would be worth only $150K ten years later, or $138,750 after LTCG tax if you cashed out. (There are no taxable dividends in this world.)

The moral of this story is that if you have too much time on your hands and are looking for ways to optimize your RMDs, you should be looking for ways to postpone paying taxes as long as possible (e.g., finding a minimal way to meet a safe harbor as late in the day as possible).

For example, you might break your RMDs into two pieces, one in January that gets reinvested, and a second in December that is 100% withheld for taxes. It should be your only tax payment of the year, and just enough to meet the lowest safe harbor. But before counting your chickens, remember to weigh this against item 1.

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Re: 2017 RMD Timing

Post by joe8d » Sun Jul 16, 2017 8:57 pm

kaneohe wrote:
Dandy wrote:Most financial reasons favor delaying RMDs to later in the year since markets usually go up and you would earn more on the RMD amount prior to withdrawal. ..........
Suppose you don't need the RMD to live on and are going to reinvest in the same fund. When you take it out after reinvesting, any gains become LTCG if held long enough vs ordinary income from the IRA. How does that affect things?
That's what and why I do that.
All the Best, | Joe

kaneohe
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Re: 2017 RMD Timing

Post by kaneohe » Sun Jul 16, 2017 10:16 pm

House Blend wrote:................................

The moral of this story is that if you have too much time on your hands ............................
Well you sure got that right! :happy
Good tips on tax drag in taxable, the importance of paying taxes as late as possible, and nice example.

Seems to me tho that the ordinary vs LTCG tax is an important factor and that the main advantage of the TIRA is the deduction you get
when you make the contribution so you can put more in TIRA than in taxable. However once you have done that ,seems like you'd want
to have the funds in a taxable if you could. A crude extreme example:
You have 100 in TIRA w/ RMD 4.

1) Market starts yr at 100 but drops to 4. A takes the RMD then leaving a 0 TIRA. The RMD gets reinvested in taxable acct of 4.
Market then recovers to 100 that yr and then 200 the next so taxable acct is 200.
2) Market starts yr at 100, drops to 4 and then recovers to 100 that yr. B takes the RMD of 4 after the recovery so has 4 in taxable
and 96 in TIRA. After market doubles next yr there is 8 in taxable and 192 in TIRA (another RMD due here)

Who is better off........A or B?

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celia
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Re: 2017 RMD Timing

Post by celia » Sun Jul 16, 2017 10:59 pm

friar1610 wrote:
celia wrote:First, there is no need so sell, take RMD, and re-purchase. You can take the RMDs in-kind (remove shares). In taxable, the basis is the value on the day the RMD is taken. And you will earn the same amount on the RMD whether it stays in the IRA or goes to taxable, assuming you don't withhold taxes from the RMD.
Just trying to understand the strategy here. How does this differ from selling the shares in the IRA, not having taxes deducted, and buying shares of the same fund the same day?
Theoretically they are the same, except if you have buy/sell commissions. [I assume you meant to add in an RMD withdrawal in the middle, not just shift your Asset Location. If you want to withdraw cash, you need to wait at least a day for the liquidation, so it is not all done in one day. Day 1: sell in TIRA. Day 2: move RMD (in cash) to taxable while re-purchasing asset of your choice.]

kaneohe wrote:
celia wrote:LTCG in taxable are taxed favorably but are taxed as ordinary income when withdrawn from the IRA. (Technically, capital gains don't exist in IRAs. Every dollar is taxed the same.) And if you never sell the investment the RMD is in, it gets a stepped-up value at death (not taxed).
Would one therefore conclude that if you are not consuming the RMD but reinvesting in taxable that the tax advantages of shifting from ordinary income to LTCG (or from LTCG to stepped up basis w/ tax of 0) that removing from TIRA ASAP during the yr. would be more favorable?
Tax-wise it is favorable to have the growth occur in taxable instead of tax-deferred since it will be taxed at 0% or 15%. But I think the act of looking for a low or high price (per my original post in this thread) has a bigger impact than the taxes on the gains. Not only does it determine the basis for that "lot" of taxable shares (assuming multiple years of RMDs), but it impacts how many shares remain in the TIRA. Looking at a moving price each day to figure out WHEN to convert will determine HOW MANY shares you will remove, if you are looking to remove a fixed dollar amount. You may want to remove as few shares as possible if you are trying to stretch the IRA or remove as many shares as possible if you are trying to bring the IRA value down. That may, or may not, be at the beginning of the year.

House Blend wrote:
friar1610 wrote:
celia wrote:First, there is no need so sell, take RMD, and re-purchase. You can take the RMDs in-kind (remove shares). In taxable, the basis is the value on the day the RMD is taken. And you will earn the same amount on the RMD whether it stays in the IRA or goes to taxable, assuming you don't withhold taxes from the RMD.
Just trying to understand the strategy here. How does this differ from selling the shares in the IRA, not having taxes deducted, and buying shares of the same fund the same day?
For someone trying to meet an RMD, an in-kind transfer is a disadvantage.

You don't know the exact price the transfer will execute at, so you don't know how many shares to transfer. And if it's an ETF, you're also limited to whole numbers of shares. So you have to put in a margin of safety, or might need a second transaction.

For mutual funds at least, it is much simpler to exchange $12,345.67 from Fund X in IRA to Fund X in taxable. You'll own exactly the same number of shares before and after. (If no tax is withheld.)
Yes, your stated method is simpler. When I asked a Vanguard rep how other people withdraw stock/ETF shares that have daily price changes to get close to the RMD amount, he told me that usually they withdraw enough whole shares to get close to the RMD. After it clears, they do a second transaction to move "cash" from the money market account to satisfy the RMD. This implies you are putting dividends into the money market account along the way instead of re-investing them.

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celia
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Re: 2017 RMD Timing

Post by celia » Sun Jul 16, 2017 11:18 pm

House Blend wrote:I think it is easiest to see this with an exaggeration. Imagine a simplified tax world in which every dollar taken from tax-deferred is taxed 25%, every LTCG dollar is taxed 15%, and the IRS is very relaxed to the point that they let you postpone tax payments for 10 years.

Now consider the consequences of taking $100K out of your trad IRA and reinvesting it in taxable. (Not needed for expenses.) The tax bill is $25K, but you have 10 years to pay it. As luck would have it, your $100K grows to $200K after 10 years, so you are happy to cash it out, leaving $160K after paying the bill and the cap gains taxes. (Never mind that you've paid the cap gains taxes 10 years early.) On the other hand, if you paid the tax bill at the time of distribution, you'd have only $75K to invest, and it would be worth only $150K ten years later, or $138,750 after LTCG tax if you cashed out. (There are no taxable dividends in this world.)
LOL !

Not only is this an exaggeration, but a fantasy world. You think you won't jump to a higher tax bracket with that size of withdrawal? OK-I'll ignore it since the same example would work with $10K. Then your money doubles with the IRS twiddling its thumbs, not charging you any interest for using THEIR money (the taxes) to double yours (and theirs--which would also double if they had been able to invest it). Why don't you just have the IRS go "out of business"? It "likes" you, so maybe they will GIVE YOU a financial bonus too! :moneybag :moneybag :moneybag

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House Blend
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Re: 2017 RMD Timing

Post by House Blend » Mon Jul 17, 2017 11:08 am

For further amusement, let me offer a slightly more realistic example. This is to reinforce my earlier point that the advantage of taking an RMD early in a rising market comes from paying ordinary income taxes later, and has nothing to do with cap gain taxes. The latter can only make things worse.

We'll continue to assume that all distributions from the IRA are taxed 25%. So in particular, there is no threat of getting bumped into a higher bracket.

We'll also assume that the owner doesn't need the RMD. She simply withdraws the RMD from Fund X and reinvests it taxably in Fund X. The account is then passed on to her beneficiaries. So in this scenario, CG taxes are as favorable as possible--there aren't any.

We will assume that Fund X returns 7% every year; initial balance $100K.

However in taxable, we'll assume only 6.7% per year. The missing 0.3% represents the tax leakage from a year's worth of dividends.

Finally, to make the RMD schedule simpler and comparisons easier, we'll assume that this is Day 1 of an IRA inherited at age 65. The RMD divisors in this case are 21, 20, ..., 1, and then full withdrawal if any balance remains. So after 22 years the IRA is empty and we'll have taxable account balances to compare.

Three RMD strategies:

A. Take the full RMD on Jan 1, withholding 25% for taxes.

B. Take 75% of the RMD on Jan 1 (no withholding) and the remainder on Dec 31 (100% withheld for taxes).

C. Take the full RMD on Dec 31, withholding 25% for taxes.

End result: A = $321,318; B = $326,744; C = $322,561.

Conclusion: If you withhold taxes at the time of distribution, timing doesn't matter much at all, with a gap of 0.39% between worst (early) and best (late). And the pay taxes late strategy gains 1.3% to 1.7% over the other two.

(None of this touches any advantages gained by market timing your RMD when returns are volatile.)
Last edited by House Blend on Mon Jul 17, 2017 4:55 pm, edited 1 time in total.

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House Blend
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Re: 2017 RMD Timing

Post by House Blend » Mon Jul 17, 2017 2:42 pm

kaneohe wrote:A crude extreme example: You have 100 in TIRA w/ RMD 4.

1) Market starts yr at 100 but drops to 4. A takes the RMD then leaving a 0 TIRA. The RMD gets reinvested in taxable acct of 4.
Market then recovers to 100 that yr and then 200 the next so taxable acct is 200.
2) Market starts yr at 100, drops to 4 and then recovers to 100 that yr. B takes the RMD of 4 after the recovery so has 4 in taxable
and 96 in TIRA. After market doubles next yr there is 8 in taxable and 192 in TIRA (another RMD due here)

Who is better off........A or B?
How were the taxes paid on the RMD?

If at distribution time, then A takes the 4 RMD, but only has 3 of it to
invest. So has 75 in taxable at year end and 150 next.

And B has 3 in taxable and 96 in TIRA, then 6 in taxable and 192 TIRA a year later.

Unclear who is better off. If tax rates are stable constants, it would be B due to less dividend tax leakage and less unrealized cap gains.

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celia
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Re: 2017 RMD Timing

Post by celia » Mon Jul 17, 2017 3:04 pm

kaneohe wrote:A crude extreme example: You have 100 in TIRA w/ RMD 4.

1) Market starts yr at 100 but drops to 4. A takes the RMD then leaving a 0 TIRA. The RMD gets reinvested in taxable acct of 4.
Market then recovers to 100 that yr and then 200 the next so taxable acct is 200.
2) Market starts yr at 100, drops to 4 and then recovers to 100 that yr. B takes the RMD of 4 after the recovery so has 4 in taxable
and 96 in TIRA. After market doubles next yr there is 8 in taxable and 192 in TIRA (another RMD due here)

Who is better off........A or B?
In case #1, the market goes -96%, (take RMD), +2500%, then 200% the next year?

Please wake me up when this early "sale" is in progress. I will finish my Roth conversions then and hardly pay any taxes! And I don't want to miss that 25-fold increase. AND I'll scrounge up every dollar I can find from the sofa cushions, re-cycled cans, and have a yard sale before things go back up.
(A double whammy---fizzle-pop in one year!!!) Then I'll be outta here!
Forget about doubling my money.. I want to 25x it. :sharebeer
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

kaneohe
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Re: 2017 RMD Timing

Post by kaneohe » Mon Jul 17, 2017 3:42 pm

House Blend wrote:
kaneohe wrote:A crude extreme example: You have 100 in TIRA w/ RMD 4.

1) Market starts yr at 100 but drops to 4. A takes the RMD then leaving a 0 TIRA. The RMD gets reinvested in taxable acct of 4.
Market then recovers to 100 that yr and then 200 the next so taxable acct is 200.
2) Market starts yr at 100, drops to 4 and then recovers to 100 that yr. B takes the RMD of 4 after the recovery so has 4 in taxable
and 96 in TIRA. After market doubles next yr there is 8 in taxable and 192 in TIRA (another RMD due here)

Who is better off........A or B?
How were the taxes paid on the RMD?

If at distribution time, then A takes the 4 RMD, but only has 3 of it to
invest. So has 75 in taxable at year end and 150 next.

And B has 3 in taxable and 96 in TIRA, then 6 in taxable and 192 TIRA a year later.

Unclear who is better off. If tax rates are stable constants, it would be B due to less dividend tax leakage and less unrealized cap gains.
Yes, somewhere along the way, I realized the paying of taxes could be critical. To make it more favorable for one case, I assumed estimated taxes
paid quarterly (safe harbor) were paid in both cases (from existing cash reserves).

kaneohe
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Re: 2017 RMD Timing

Post by kaneohe » Mon Jul 17, 2017 3:45 pm

House Blend wrote:For further amusement, let me offer a slightly more realistic example. This is to reinforce my earlier point that the advantage of taking an RMD early in a rising market comes from paying ordinary income taxes later, and has nothing to do with cap gain taxes. The latter can only make things worse.

We'll continue to assume that all distributions from the IRA are taxed 25%. So in particular, there is no threat of getting bumped into a higher bracket.

We'll also assume that the owner doesn't need the RMD. She simply withdraws the RMD from Fund X and reinvests it taxably in Fund X. The account is then passed on to her beneficiaries. So in this scenario, CG taxes are as favorable as possible--there aren't any.

We will assume that Fund X returns 7% every year; initial balance $100K.

However in taxable, we'll assume only 6.7% per year. The missing 0.3% represents the tax leakage from a year's worth of dividends.

Finally, to make the RMD schedule simpler and comparisons easier, we'll assume that this is Day 1 of an IRA inherited at age 65. The RMD divisors in this case are 21, 20, ..., 1, and then full withdrawal if any balance remains. So after 22 years the IRA is empty and we'll have taxable account balances to compare.

Three RMD strategies:

A. Take the full RMD on Jan 1, withholding 25% for taxes.

B. Take 75% of the RMD on Jan 1 (no withholding) and the remainder on Dec 31 (100% withheld for taxes).

C. Take the full RMD on Dec 31, withholding 25% for taxes.

End result: A = $321,318; B = $326,744; C = $322,475.

Conclusion: If you withhold taxes at the time of distribution, timing doesn't matter much at all, with a gap of 0.36% between worst (early) and best (late). And the pay taxes late strategy gains 1.3% to 1.7% over the other two.

(None of this touches any advantages gained by market timing your RMD when returns are volatile.)
HouseBlend........appreciate the time you spent on this. Just for academic purposes, is it easy to take out the 0.3% tax leakage .........the comparison would demonstrate the cumulative effect of this tax drag......which may be larger than I thought.

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House Blend
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Re: 2017 RMD Timing

Post by House Blend » Mon Jul 17, 2017 4:52 pm

kaneohe wrote:HouseBlend........appreciate the time you spent on this. Just for academic purposes, is it easy to take out the 0.3% tax leakage .........the comparison would demonstrate the cumulative effect of this tax drag......which may be larger than I thought.
OK, so if you want 0 taxes on dividends, I get

A = C = $332,280; B = $337,805

The A = C follows because all that is happening is a 25% haircut as money moves from one account to another; it doesn't matter how fast or slow it happens. It is simply 0.75 * $100K * (1.07)^22.

Also, I caught a bug in the previous calculation for C (related to how the final RMD is taken), so it is slightly better than previously stated. Will edit the prior post.

kaneohe
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Re: 2017 RMD Timing

Post by kaneohe » Mon Jul 17, 2017 5:45 pm

House Blend wrote:
kaneohe wrote:HouseBlend........appreciate the time you spent on this. Just for academic purposes, is it easy to take out the 0.3% tax leakage .........the comparison would demonstrate the cumulative effect of this tax drag......which may be larger than I thought.
OK, so if you want 0 taxes on dividends, I get

A = C = $332,280; B = $337,805

The A = C follows because all that is happening is a 25% haircut as money moves from one account to another; it doesn't matter how fast or slow it happens. It is simply 0.75 * $100K * (1.07)^22.

Also, I caught a bug in the previous calculation for C (related to how the final RMD is taken), so it is slightly better than previously stated. Will edit the prior post.
Thanks for checking that.........I might have guessed 0.3% x 22 yrs as first order lazy man (=6.6%) vs actual more like 3% or so so not huge.
Guess we know who else has too much time on their hands :happy

Naikansha
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Re: 2017 RMD Timing

Post by Naikansha » Tue Jul 18, 2017 10:58 pm

For Bogelheads about to take their RMD, I suggest an earlier date for this procedure than year-end for the following reason.

I have taken RMD now for four years; three of those years included qualified charitable distributions so everything was done over the phone in order that checks for QCD could be sent me to be forwarded to the charities. The previous years' RMD were taken towards the end of the year, but this year, fortunately, I took it July 6. After going through the procedure (it took about an hour), I received confirmation that the post-tax balance transfer out of my IRA went into my taxable account.
As of this evening (July 18), while the amounts have been confirmed on a Vanguard statement and at the 'recent transaction history' section of the on-line fund information, they do NOT appear on the fund cost basis listings. I emailed to ask why and was told it would take three or four weeks to have the listings updated! It seems the full reporting on Vanguard fund listings may be held up for some time. Good luck to everyone.

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