I'm not sure what you tried to illustrate here, after quoting my post.UpsetRaptor wrote: ↑Wed Nov 06, 2019 9:41 pmTheoretically taking later does help, but in my opinion, it really doesn't matter all that much, so personal preference is still certainly viable. An example:joylesshusband wrote: ↑Wed Nov 06, 2019 6:46 pmI disagree.
It does matter if you reinvest, and here's why:
RMDs, being a simple vehicle for the taxman to get his cut from you, are based on the total of your traditional IRAs at the end of the previous year.
I have never enjoyed having less money in my pocket due to having paid a larger tax bill. "Taking" RMDs as early as possible prevents this from happening.
Let's keep in mind that the markets' direction is UP. They have their fluctuations, but the general direction is always UP, and that's why people invest.
Leaving the annual RMD amount in the traditional IRA for most of the year it should be "taken out" results in more growth (generated by said annual RMD) in the trad. IRA, which in turn means that my next year RMD would be larger, resulting in an even larger tax due.
If you "took" the RMD the first business day of the year, this entire growth would occur in your taxable account, denying the extra growth of the trad. IRA. End result: larger taxable account, smaller RMD next year, smaller tax due, and faster reduction of the entire trad. IRAs.
Net: more money in your pocket.
$1M IRA 12/31 prior year, current year RMD divisor is 22. Investments earn 6% current year.
Scenario 1: On Jan 1, took RMD on $1M balance.
RMD = $1M/22 = $45,455.
$45,455 into taxable, $954,545 left in IRA. Both gain 6%* over the year.
Account balances: Taxable = $48,182*, IRA = $1,011,818
You pay tax on $45,455 ordinary income, $2,727 cap gains
Scenario 2: Waited until 12/31 to take RMD.
$1M balance gains 6% = $1,060,000. Take RMD $1M/22 = $45,455
Account Balances: Taxable = $45,455. IRA = $1,014,545
You pay tax on $45,455 ordinary income, $0 cap gains
Total account balances are ostensibly the same, but in Scenario 1 you'll pay a cap gains tax on $2,727, so let's say $409 at 15%.
* The dividend drag on taxable investment. Let's assume 15% cap gains x 2% dividend = .3, so 5.7% gain instead of 6%. Costs $136.
So a rough difference of ~$500 on a $1M IRA with these assumptions.
Edit to fix math mistake per Sport.
Your Scenario 1 is flawed, as I specifically addressed reinvestment, hence the $45+k new money in taxable don't get sold, thus there's no capital gains to be taxed whatsoever.
Also, I clearly targeted what happens down the timeline (the next year, and the one after, and so on...), while you stopped on Year 1.
The difference gets pretty sizable after a few years.