Required Minimum Distribution Questions

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ltrmc02
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Required Minimum Distribution Questions

Post by ltrmc02 » Fri Jul 12, 2019 2:08 am

I helped my dad take a RMD from his old pre-tax work retirement plan and didn't have the discretion to choose whether it came from his stable value fund or his stock fund. I was told that the requested balance would be pulled from each fund proportionally. I do recall reading about having to take a RMD from each type of account awhile back but this has got me wondering if one has all of their retirement in an IRA with a broker and divided between say three stocks and some cash would the RMD have to pull from all three stocks and cash balance proportionally or could only the cash balance be withdrawn if it was in excess of the required amount to be withdrawn?

rossington
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Re: Required Minimum Distribution Questions

Post by rossington » Fri Jul 12, 2019 3:50 am

Your broker (in my case Vanguard) should notify you early in the current tax year what the calculated RMD amount will be. You have options as to which investment in the IRA the RMD will be deducted. Read this:https://personal.vanguard.com/us/help/F ... ontent.jsp > "Which funds should I take my RMD from?"
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Dandy
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Re: Required Minimum Distribution Questions

Post by Dandy » Fri Jul 12, 2019 5:53 am

I take my RMD from my Vanguard brokerage TIRA proportionately. They take it from the funds but not my brokerage CDs.

Spirit Rider
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Re: Required Minimum Distribution Questions

Post by Spirit Rider » Fri Jul 12, 2019 7:20 am

It is not uncommon for custodians to require RMDs to come proportionally from all holdings.

However, it is irrelevant in a tax-advantaged account. You can always adjust your account holdings after this occurs. In fact, I know many people who schedule their rebalancing after taking their RMDs.

cherijoh
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Re: Required Minimum Distribution Questions

Post by cherijoh » Fri Jul 12, 2019 7:27 am

ltrmc02 wrote:
Fri Jul 12, 2019 2:08 am
I helped my dad take a RMD from his old pre-tax work retirement plan and didn't have the discretion to choose whether it came from his stable value fund or his stock fund. I was told that the requested balance would be pulled from each fund proportionally. I do recall reading about having to take a RMD from each type of account awhile back but this has got me wondering if one has all of their retirement in an IRA with a broker and divided between say three stocks and some cash would the RMD have to pull from all three stocks and cash balance proportionally or could only the cash balance be withdrawn if it was in excess of the required amount to be withdrawn?
I have an inherited IRA at VG and my RMD can come from whatever combination of funds I want.

The proportional withdrawal strategy you describe is standard opwrating procedure for workplace - I gues to keep things simple. But it isn't an issue since (as others have mentioned) the employee/retiree can readjust their allocation without any tax-consequences.

mslaw
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Re: Required Minimum Distribution Questions

Post by mslaw » Fri Jul 12, 2019 8:05 am

This was an interesting question. Are there retirement accounts or in fact, only one retirement account?
Actually, the very good summary, provided in the article referenced below, would lead me to question the retirement administrator’s actions.

https://www.investopedia.com/articles/r ... 120604.asp

Spirit Rider
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Re: Required Minimum Distribution Questions

Post by Spirit Rider » Fri Jul 12, 2019 10:01 am

mslaw wrote:
Fri Jul 12, 2019 8:05 am
This was an interesting question. Are there retirement accounts or in fact, only one retirement account?
Actually, the very good summary, provided in the article referenced below, would lead me to question the retirement administrator’s actions.

https://www.investopedia.com/articles/r ... 120604.asp
The OP said nothing about being forced to take the RMD, only that the plan required the RMD to come proportionally. Which a plan is full authorised to do so. Even if the RMD was forced, you didn't fully understand the article, especially this part;

You may not combine the RMDs for multiple qualified plans. "If you have 401(k) plans from former employers, you would need to take RMDs on those, and, unlike IRAs, you would need to calculate the RMD for each plan and take that amount from each account,"

Also, in addition to IRAs, 403b plans can be aggregated for RMDs, but neither can be aggregated with each other or 401k plans.

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ResearchMed
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Re: Required Minimum Distribution Questions

Post by ResearchMed » Fri Jul 12, 2019 10:57 am

Spirit Rider wrote:
Fri Jul 12, 2019 10:01 am
mslaw wrote:
Fri Jul 12, 2019 8:05 am
This was an interesting question. Are there retirement accounts or in fact, only one retirement account?
Actually, the very good summary, provided in the article referenced below, would lead me to question the retirement administrator’s actions.

https://www.investopedia.com/articles/r ... 120604.asp
The OP said nothing about being forced to take the RMD, only that the plan required the RMD to come proportionally. Which a plan is full authorised to do so. Even if the RMD was forced, you didn't fully understand the article, especially this part;

You may not combine the RMDs for multiple qualified plans. "If you have 401(k) plans from former employers, you would need to take RMDs on those, and, unlike IRAs, you would need to calculate the RMD for each plan and take that amount from each account,"

Also, in addition to IRAs, 403b plans can be aggregated for RMDs, but neither can be aggregated with each other or 401k plans.
A nit to pick about terminology: 403b plans are *also* "qualified plans", not just 401k plans.

So one part above isn't quite right.

Also, I'm forgetting the reason, but I think it was stated here (BH) that one should calculate the RMD for *each* of the aggregated accounts, and *then* take the total from one, if one wants to aggregrate. IIRC, it's not just the tiny rounding error that is of concern, but perhaps I remembered this part incorrectly (e.g., "IIRI"?).

RM
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Alan S.
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Re: Required Minimum Distribution Questions

Post by Alan S. » Fri Jul 12, 2019 11:35 am

A 403b plan is technically NOT a QRP (qualified retirement plan) and has it's own set of IRS Regs. But for most purposes it is treated like one.

One difference is that RMD aggregation rules among 403b plans operate the same way as aggregation between IRA accounts. Your RMD can be taken in any combination from your 403b plans if you own more than one. This rule has been it challenging for 403 administrators to be sure that their plan has met the RMD rules since they only control their own 403b plan.

As for 401k plans, each plan must satisfy it's own RMD, but sub accounts within the plan are all treated as a single plan. IRS rules allow you to satisfy the plan RMD in combination from your pre tax balance, your separate after tax balance, or even your Roth 401k balance. But many plans have restricted their RMD rules to require pro rata distributions, particularly between the Roth and other sub accounts. Therefore, you may well not have the control of how your RMD is funded in certain plans like you would with an IRA where you can take your RMDs from any account or any investments you please. Some qualified plans including the TSP will not even use Table II for RMDs if your spouse is >10 years younger than you are.

Topic Author
ltrmc02
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Re: Required Minimum Distribution Questions

Post by ltrmc02 » Thu Jul 18, 2019 3:10 am

Spirit Rider wrote:
Fri Jul 12, 2019 7:20 am
It is not uncommon for custodians to require RMDs to come proportionally from all holdings.

However, it is irrelevant in a tax-advantaged account. You can always adjust your account holdings after this occurs. In fact, I know many people who schedule their rebalancing after taking their RMDs.
Well I'm looking at it a bit differently which would make where it came from more relevant. I'd only want to draw from a stock or fund in the account that I felt was at a high valuation and not draw from something that I felt was undervalued at that point in time. I know an "in kind" transfer would suffice in most cases if one felt the value of the equities held were too cheap throughout that year to cash out of.

I'm rolling over a portion of a work sponsored plan into a retail brokerage IRA. Next year when taking the RMD from the retail brokerage and assume it contains equal 25% holdings between a (tech stock, health care stock, energy stock and a cash balance) would a portion of each holding have to be drawn from or could all be drawn from say the over valued tech stock to cover the RMD for the year in that account?

I am pretty sure a RMD would have to be taken from both the work sponsored plan and the retail brokerage account but hope that it won't have to be a proportional draw of all the assets in the retail brokerage account?

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Re: Required Minimum Distribution Questions

Post by Spirit Rider » Thu Jul 18, 2019 10:02 am

ltrmc02 wrote:
Thu Jul 18, 2019 3:10 am
Spirit Rider wrote:
Fri Jul 12, 2019 7:20 am
However, it is irrelevant in a tax-advantaged account. You can always adjust your account holdings after this occurs. In fact, I know many people who schedule their rebalancing after taking their RMDs.
Well I'm looking at it a bit differently which would make where it came from more relevant. I'd only want to draw from a stock or fund in the account that I felt was at a high valuation and not draw from something that I felt was undervalued at that point in time. I know an "in kind" transfer would suffice in most cases if one felt the value of the equities held were too cheap throughout that year to cash out of.
You are are still not understanding the point. Even if the plan distributes assets in a proportion you didn't want, it is still just a fungible amount of money. You can simply sell the assets you wanted it to come from and use the money to buy the assets you didn't want it to come from. Since it is a tax-advantaged account there are no tax consequences, only little to no transaction costs.
I am pretty sure a RMD would have to be taken from both the work sponsored plan and the retail brokerage account but hope that it won't have to be a proportional draw of all the assets in the retail brokerage account?
RMDs are required from 401k accounts separately, but IRAs can be aggregated and the total RMD required can be taken from one or more accounts. Even in the case of IRAs, automatic RMDs are often taken in proportion. If you manually take distributions >= to the RMD amount, you can take them in any proportion you want.

delamer
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Re: Required Minimum Distribution Questions

Post by delamer » Thu Jul 18, 2019 10:22 am

Spirit Rider wrote:
Fri Jul 12, 2019 7:20 am
RMDs are required from 401k accounts separately, but IRAs can be aggregated and the total RMD required can be taken from one or more accounts. Even in the case of IRAs, automatic RMDs are often taken in proportion. If you manually take distributions >= to the RMD amount, you can take them in any proportion you want.
I still am below RMD age, but curious as to the mechanics of manually taking distributions.

Say my RMD is $15,000 in 2025 for my only IRA. If I initiate a withdrawal of $15,000 in June 2025, will my brokerage record in my account that I have met my RMD? And will I hear no further from them regarding RMDs except for my annual tax statement?

What if the scenario is the same but I have IRAs at two different brokerages and I take my total RMD (across both accounts) from broker#1 only? What will broker#2 do?

Alan S.
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Re: Required Minimum Distribution Questions

Post by Alan S. » Thu Jul 18, 2019 10:53 am

delamer wrote:
Thu Jul 18, 2019 10:22 am
Spirit Rider wrote:
Fri Jul 12, 2019 7:20 am
RMDs are required from 401k accounts separately, but IRAs can be aggregated and the total RMD required can be taken from one or more accounts. Even in the case of IRAs, automatic RMDs are often taken in proportion. If you manually take distributions >= to the RMD amount, you can take them in any proportion you want.
I still am below RMD age, but curious as to the mechanics of manually taking distributions.

Say my RMD is $15,000 in 2025 for my only IRA. If I initiate a withdrawal of $15,000 in June 2025, will my brokerage record in my account that I have met my RMD? And will I hear no further from them regarding RMDs except for my annual tax statement?

What if the scenario is the same but I have IRAs at two different brokerages and I take my total RMD (across both accounts) from broker#1 only? What will broker#2 do?
Q1 - since the first distribution in an RMD distribution year is automatically applied against the RMD, the custodian is not likely to make a notation in your statements regarding the RMD status. The 1099R will also not mention RMDs in any matter. The IRS simply looks at your 1099R amount to determine if the RMD was met or not.

Q2 - the RMD aggregation rules you mention are the reason for the above answer. One custodian does not know what your other accounts are or what the RMD status is for them. All they know is your RMD for their own account and whether you have distributed that amount or not from their own account. Therefore, they never know if you actually completed your RMD or not. Most custodians just advise you very early in the year what your RMD amount is for their IRA account, then that is the last you hear. Some custodians may follow up a second time if there has been no distribution.

I have never taken an RMD from my Vanguard TIRA as I satisfy the total RMD from my Schwab IRA. Both notify me of my RMD amount early in the year, and I never hear further from them. However, nationwide RMD leakage has always been substantial, partly due to the aggregation rules, so at some point the IRS could introduce additional compliance measures if they want to close this gap. Currently, the IRA custodians deserve credit for what they do, but the IRS actually has your year end balances, they know your age and they know what you actually distributed from the 1099R forms - but they are not checking their info to see if the total RMD has been met. Then they waive the penalty for almost any reason if you file a 5329 requesting a waiver if you fall short. Pretty sloppy performance considering the lost tax revenue.

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Harry Livermore
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Re: Required Minimum Distribution Questions

Post by Harry Livermore » Thu Jul 18, 2019 11:16 am

My wife and I are YEARS away from RMDs so I have not begun to study up on this topic ;)
But in the interest of making it as foolproof as possible, wouldn't you want to simply roll everything that's non-ROTH or non-ND-IRA into an individual IRA? This way the amount of RMD is easily calculated?
For example, I have an old SEP, an individual ND IRA, and a currently active Keough plan (in addition to a ROTH conversion and an old contributory ROTH) When I retire and close down my small business, why wouldn't I just roll it all (minus the ROTHs) into a new IRA? Ditto for my wife's 403(b) into her IRA?
Also, has anyone in the history of investing taken MORE than the RMD? Just as a buffer? I presume some folks who spend more than they technically should might do this. I know that the penalties for withdrawing less than the minimum are incredibly punitive.
I have some reading to do I think :)
Cheers

delamer
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Re: Required Minimum Distribution Questions

Post by delamer » Thu Jul 18, 2019 11:40 am

Alan S. wrote:
Thu Jul 18, 2019 10:53 am
delamer wrote:
Thu Jul 18, 2019 10:22 am
Spirit Rider wrote:
Fri Jul 12, 2019 7:20 am
RMDs are required from 401k accounts separately, but IRAs can be aggregated and the total RMD required can be taken from one or more accounts. Even in the case of IRAs, automatic RMDs are often taken in proportion. If you manually take distributions >= to the RMD amount, you can take them in any proportion you want.
I still am below RMD age, but curious as to the mechanics of manually taking distributions.

Say my RMD is $15,000 in 2025 for my only IRA. If I initiate a withdrawal of $15,000 in June 2025, will my brokerage record in my account that I have met my RMD? And will I hear no further from them regarding RMDs except for my annual tax statement?

What if the scenario is the same but I have IRAs at two different brokerages and I take my total RMD (across both accounts) from broker#1 only? What will broker#2 do?
Q1 - since the first distribution in an RMD distribution year is automatically applied against the RMD, the custodian is not likely to make a notation in your statements regarding the RMD status. The 1099R will also not mention RMDs in any matter. The IRS simply looks at your 1099R amount to determine if the RMD was met or not.

Q2 - the RMD aggregation rules you mention are the reason for the above answer. One custodian does not know what your other accounts are or what the RMD status is for them. All they know is your RMD for their own account and whether you have distributed that amount or not from their own account. Therefore, they never know if you actually completed your RMD or not. Most custodians just advise you very early in the year what your RMD amount is for their IRA account, then that is the last you hear. Some custodians may follow up a second time if there has been no distribution.

I have never taken an RMD from my Vanguard TIRA as I satisfy the total RMD from my Schwab IRA. Both notify me of my RMD amount early in the year, and I never hear further from them. However, nationwide RMD leakage has always been substantial, partly due to the aggregation rules, so at some point the IRS could introduce additional compliance measures if they want to close this gap. Currently, the IRA custodians deserve credit for what they do, but the IRS actually has your year end balances, they know your age and they know what you actually distributed from the 1099R forms - but they are not checking their info to see if the total RMD has been met. Then they waive the penalty for almost any reason if you file a 5329 requesting a waiver if you fall short. Pretty sloppy performance considering the lost tax revenue.
Very helpful, thank you.

Would you elaborate on what you mean by “RMD leakage?”

Spirit Rider
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Re: Required Minimum Distribution Questions

Post by Spirit Rider » Thu Jul 18, 2019 11:49 am

A couple of clarifications.

Non-deductible IRA contributions are not a separate type of IRA. They are simply non-deductible contributions to a traditional IRA. It is irrelevant that they are made to a different account. All balances in all tradtional, SEP and SIMPLE IRA accounts are treated as one account.

The same is true with regard to Roth conversions. The fact that a conversion was done to a separate Roth IRA account is irrelevant. All Roth IRAs are treated as one account.

"Also, has anyone in the history of investing taken MORE than the RMD?"

I don't know where you got this assumption. Probably a significant majority of individuals distribute more than RMD amounts from their retirement accounts at some point in time.

There are many reasons why someone might leave their funds in an employer plan:
  • 457b plans allow the penalty-free distribution at any age after separation.
  • In 401k or 403b plans, you can take penalty-free distributions if you separate in the year they are >= age 55.
  • 401k plans have ERISA anti-alienation asset protection. This can be far greater protection then protection in some states than for an IRA.
  • They might have some better investment options in their employer plans.
  • Etc...

delamer
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Re: Required Minimum Distribution Questions

Post by delamer » Thu Jul 18, 2019 11:54 am

Harry Livermore wrote:
Thu Jul 18, 2019 11:16 am
My wife and I are YEARS away from RMDs so I have not begun to study up on this topic ;)
But in the interest of making it as foolproof as possible, wouldn't you want to simply roll everything that's non-ROTH or non-ND-IRA into an individual IRA? This way the amount of RMD is easily calculated?
For example, I have an old SEP, an individual ND IRA, and a currently active Keough plan (in addition to a ROTH conversion and an old contributory ROTH) When I retire and close down my small business, why wouldn't I just roll it all (minus the ROTHs) into a new IRA? Ditto for my wife's 403(b) into her IRA?
Also, has anyone in the history of investing taken MORE than the RMD? Just as a buffer? I presume some folks who spend more than they technically should might do this. I know that the penalties for withdrawing less than the minimum are incredibly punitive.
I have some reading to do I think :)
Cheers
Some people prefer to have assets at more than one brokerage, and so don’t roll all eligible accounts into one.

Why would you assume that anyone taking more than their RMD “spend more than they technically should?” For one thing, the RMD withdrawal percentage increases with age and becomes higher than the oft-recommended 4% safe withdrawal rate. In that case, someone might take their RMD but save a chunk of it in a taxable account.

There also might be tax-efficiency reasons to withdraw more than the 4%. In our case, due to the age difference, our marginal tax rate will go up when the younger of us starts RMDs. So it probably will make sense for the older of us to take withdrawals up to the top of the lower marginal rate while we can.

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Harry Livermore
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Re: Required Minimum Distribution Questions

Post by Harry Livermore » Thu Jul 18, 2019 2:41 pm

Thank you both for your responses.
I will do my own research from here, thanks.
Cheers

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