RMDs – Best time to take during the year?

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goshenBogle
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RMDs – Best time to take during the year?

Post by goshenBogle » Wed Nov 08, 2017 1:26 pm

What strategy during the year should be used as to when RMDs should be taken?

I start taking RMDs in 2018. I do not need RMDs for living expenses. Federal taxes will be paid from RMDs with the remaining RMDs invested in the same fund but in an existing taxable account.

(1) Should RMDs be taken all at once? If so, at what time during the year?

(2) In a rising market, taking RMDs at year end would allow IRAs to grow, increasing RMDs for following year?

(3) Should taking RMDs be spread throughout the year? If so, what schedule should be followed?

(4) Should taking RMDs be done only after a fund has paid a dividend? In other words, would dividend be lost if taking RMDs before dividend is paid even if the RMDs are moved to the same fund but in a taxable account?
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sport
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Re: RMDs – Best time to take during the year?

Post by sport » Wed Nov 08, 2017 1:39 pm

Here is what I do:
When you reach 70.5, you are allowed to make Qualified Charitable Distributions (QCDs) that count towards your Required Minimum Distribution (RMD) from an IRA. The QCDs are not taxable. However, the first withdrawals from an IRA count towards your RMD. So, if you want to make QCDs, you do not want to take too much of your RMD too soon. Accordingly, I make my QCDs during the year, and take the balance of my RMD near the end of the year, usually in November.

WhiteMaxima
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Re: RMDs – Best time to take during the year?

Post by WhiteMaxima » Wed Nov 08, 2017 1:51 pm

If you ask this question from Bogleheads, they will tell you never time the market. Not the timing but the time in the market. I guess it would be Dec 31 to be exactly.

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Re: RMDs – Best time to take during the year?

Post by tomd37 » Wed Nov 08, 2017 3:03 pm

I have been doing as Sport mentioned, taking my first RMD as a QCD in September and then taking the remaining balance of the RMD in October or November. I calculate what percentage of that remaining RMD is needed to be withheld for federal tax purposes so that my total federal tax withheld from all sources of income very closely approximates my total federal tax. Keep in mind that in this example the tax withheld in the last RMD is considered to have been withheld over the course of the year so I do not make any estimated tax payments quarterly.
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Re: RMDs – Best time to take during the year?

Post by pkcrafter » Wed Nov 08, 2017 3:25 pm

I take RMD in November to shorten the time the taxes are sitting idle. I don't wait until Dec because if there's a hang up, I want time to get it straightened out. This has happened once. In addition, one might have a better idea on where to take the distribution from near the end of the year. You can use an RMD to help rebalance.

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Watty
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Re: RMDs – Best time to take during the year?

Post by Watty » Wed Nov 08, 2017 4:46 pm

There have been lots of threads about this including this one.

viewtopic.php?f=1&t=230820&hilit=rmd+consensus#p3591008

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brother7
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Re: RMDs – Best time to take during the year?

Post by brother7 » Wed Nov 08, 2017 6:07 pm

I have a few recommendations:
  1. Take the RMD late in the year, like November, to allow any capital gains to be earned in the tax-deferred account, thus deferring any tax due on those gains.
  2. RMDs don't have to be in cash. They can be in-kind, ie shares in a mutual fund. If the tax-deferred account is at Vanguard, I'd open a regular taxable account at Vanguard and instruct Vanguard to do an in-kind transfer from tax-deferred account to taxable account to satisfy your RMD.
  3. In regards to timing the dividend payment, since dividends in a taxable account receive preferred tax treatment (in contrast, dividends in a tax-deferred account are taxed as ordinary income when withdrawn), I would complete the in-kind transfer BEFORE the ex-dividend date.

Nowizard
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Re: RMDs – Best time to take during the year?

Post by Nowizard » Wed Nov 08, 2017 6:54 pm

Similarly, we do not need the RMD to survive, and we reinvest much of them in taxable accounts. Our strategy is simple. We use RMD's to rebalance if necessary or withdraw from accounts that result in simplifying our portfolio while moving toward a three fund one. This generally means withdrawing early in the year since that is also the time when we have the largest bills (Christmas, property tax, insurance, etc.).

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Re: RMDs – Best time to take during the year?

Post by heyyou » Wed Nov 08, 2017 8:46 pm

I calculate what percentage of that remaining RMD is needed to be withheld for federal tax purposes so that my total federal tax withheld from all sources of income very closely approximates my total federal tax. Keep in mind that in this example the tax withheld in the last RMD is considered to have been withheld over the course of the year so I do not make any estimated tax payments quarterly.
I second what tomd37 said above.

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Re: RMDs – Best time to take during the year?

Post by Dale_G » Wed Nov 08, 2017 9:17 pm

Ditto. I take the RMD in the third week of December after dividends are declared by the funds in my taxable account. I can then closely calculate my annual tax bill. I have taxes withheld - and the balance goes to the taxable account.
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Re: RMDs – Best time to take during the year?

Post by CedarWaxWing » Thu Nov 09, 2017 12:11 am

brother7 wrote:
Wed Nov 08, 2017 6:07 pm
I have a few recommendations:
  1. Take the RMD late in the year, like November, to allow any capital gains to be earned in the tax-deferred account, thus deferring any tax due on those gains.
  2. RMDs don't have to be in cash. They can be in-kind, ie shares in a mutual fund. If the tax-deferred account is at Vanguard, I'd open a regular taxable account at Vanguard and instruct Vanguard to do an in-kind transfer from tax-deferred account to taxable account to satisfy your RMD.
  3. In regards to timing the dividend payment, since dividends in a taxable account receive preferred tax treatment (in contrast, dividends in a tax-deferred account are taxed as ordinary income when withdrawn), I would complete the in-kind transfer BEFORE the ex-dividend date.
Question in regards to the taxes on "long term CGains" on funds that were taken out as share of mutual funds "in kind" as RMDs in November:

Are you considered, for tax purposes, to have owned those shares for only since November, or are those "LT CGains" (and qualified dividends) still taxed as a long term holding, if they were in your t IRA (or Roth for that matter) for at least 12 months prior to the in kind transfer?

What if you also purchased some of the same fund in, shall we say October, with dividends your t IRA received in September. Is is necessary to specify a certain lot to transfer in kind so as to avoid short term treatment of the otherwise LTCGains in December?

If you have a 3 fund portfolio in your tIRA... and have only two equity funds... I could see how rebalancing in March could in fact result in unfavorable treatment of your RMDs taken in kind in November when the December distributions occur if you did not specify the lots to transfer out as RMDs.

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brother7
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Re: RMDs – Best time to take during the year?

Post by brother7 » Thu Nov 09, 2017 1:08 am

CedarWaxWing wrote:
Thu Nov 09, 2017 12:11 am
brother7 wrote:
Wed Nov 08, 2017 6:07 pm
I have a few recommendations:
  1. Take the RMD late in the year, like November, to allow any capital gains to be earned in the tax-deferred account, thus deferring any tax due on those gains.
  2. RMDs don't have to be in cash. They can be in-kind, ie shares in a mutual fund. If the tax-deferred account is at Vanguard, I'd open a regular taxable account at Vanguard and instruct Vanguard to do an in-kind transfer from tax-deferred account to taxable account to satisfy your RMD.
  3. In regards to timing the dividend payment, since dividends in a taxable account receive preferred tax treatment (in contrast, dividends in a tax-deferred account are taxed as ordinary income when withdrawn), I would complete the in-kind transfer BEFORE the ex-dividend date.
Question in regards to the taxes on "long term CGains" on funds that were taken out as share of mutual funds "in kind" as RMDs in November:

Are you considered, for tax purposes, to have owned those shares for only since November, or are those "LT CGains" (and qualified dividends) still taxed as a long term holding, if they were in your t IRA (or Roth for that matter) for at least 12 months prior to the in kind transfer?

What if you also purchased some of the same fund in, shall we say October, with dividends your t IRA received in September. Is is necessary to specify a certain lot to transfer in kind so as to avoid short term treatment of the otherwise LTCGains in December?

If you have a 3 fund portfolio in your tIRA... and have only two equity funds... I could see how rebalancing in March could in fact result in unfavorable treatment of your RMDs taken in kind in November when the December distributions occur if you did not specify the lots to transfer out as RMDs.
The concept of LT and ST capital gains are meaningless within a retirement account. It doesn't matter... it all gets taxed as ordinary income when it leaves the account, whether as cash or as an in-kind transfer.

I'm not 100% sure how it works BUT I believe it goes something like this:

Assume you have a traditional IRA. Assume all contributions into that IRA were deductible in the year of the contribution, ie no non-deductible contributions were made. In that case, ALL DISTRIBUTIONS FROM THE IRA ARE TAXABLE. From a taxation viewpoint, there's no need to identify which lots to transfer in-kind. However, from a dividend viewpoint, I can see where it's important to identify which shares were acquired after the ex-dividend date and which were acquired on or before the ex-dividend date. I'll leave that exercise to the reader. :mrgreen:

Ignoring the dividend issue for now, on the transfer date, the custodian will determine the value of the shares transferred in-kind. Since it's all taxable, that value is what's reported as a distribution on the Form 1099-R. And that's what you'll be taxed on as ordinary income.

Now, for the in-kind shares received in the non-retirement account, I believe those shares receive a new acquisition date (the date of the transfer) and a new basis (the value on the date of the transfer). (That part I'm not 100% certain but it makes sense to me. Might want to ask an expert to confirm.)

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Re: RMDs – Best time to take during the year?

Post by DarthSage » Thu Nov 09, 2017 7:23 am

There are two schools of thought on this:

Take the RMD in Jan., for more growth outside the IRA

Take the RMD in Dec., for more growth inside the IRA

Neither is wrong.

Beyond that, you should look at when might work best for you--Dec. 1, so you can have a fancy Christmas? In March, to pay your taxes?

My husband is in the process of managing/distributing his mother's estate. She had no fewer than 7 different IRA accounts. Right now, DH/BIL are handling the 2017 RMDs she didn't take. In 2018, DH begins his own RMDs. We picked my FIL's birthday (in Feb.) as our RMD withdrawal date, for a couple of reasons. Obviously, it's easy for DH to remember, and think of his parents fondly. We also felt that the December time frame quickly gets cluttered, so it can be easy for things to slip. If that happens in Feb., there's recovery time--Dec., not so much.

Obviously, we hope to get the 7 IRAs all under one roof and consolidated (except the one Roth), but right now, the priority is getting the 2017 RMDs set and taking care of the estate.

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Re: RMDs – Best time to take during the year?

Post by ee_guy » Thu Jul 30, 2020 4:56 pm

Gains inside a IRA is taxed when withdrawn at ordinary tax rates. If the RMD is invested outside the IRA capital gains tax rate is lower. In this situation, taking RMD earlier is preferred.
DarthSage wrote:
Thu Nov 09, 2017 7:23 am
There are two schools of thought on this:

Take the RMD in Jan., for more growth outside the IRA

Take the RMD in Dec., for more growth inside the IRA

Neither is wrong.

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Re: RMDs – Best time to take during the year?

Post by duffer » Thu Jul 30, 2020 5:51 pm

ee_guy wrote:
Thu Jul 30, 2020 4:56 pm
Gains inside a IRA is taxed when withdrawn at ordinary tax rates. If the RMD is invested outside the IRA capital gains tax rate is lower. In this situation, taking RMD earlier is preferred.
I do not have a detailed familiarity with the tax and withholding rules for RMDs. So I ask to be checked on the following:

If taxes on the RMD are not due until April 15th of the following year, then the best thing to do would be to withdraw your RMD on January 1st (preferably without withholding any taxes, if that is permitted???) and reinvest it all immediately in a taxable account. Gains for the RMD within that account during the year would be taxed at the capital gains rate rather than at the ordinary income rate.

Is the above correct?

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Re: RMDs – Best time to take during the year?

Post by kaneohe » Thu Jul 30, 2020 6:18 pm

duffer wrote:
Thu Jul 30, 2020 5:51 pm
ee_guy wrote:
Thu Jul 30, 2020 4:56 pm
Gains inside a IRA is taxed when withdrawn at ordinary tax rates. If the RMD is invested outside the IRA capital gains tax rate is lower. In this situation, taking RMD earlier is preferred.
I do not have a detailed familiarity with the tax and withholding rules for RMDs. So I ask to be checked on the following:

If taxes on the RMD are not due until April 15th of the following year, then the best thing to do would be to withdraw your RMD on January 1st (preferably without withholding any taxes, if that is permitted???) and reinvest it all immediately in a taxable account. Gains for the RMD within that account during the year would be taxed at the capital gains rate rather than at the ordinary income rate.

Is the above correct?
In the absence of more info, IRS assumes income is distributed evenly during the yr so you would owe 4 equal estimated tax payments for the RMD taken Jan 1.

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Re: RMDs – Best time to take during the year?

Post by Van » Thu Jul 30, 2020 6:19 pm

December 15.

duffer
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Re: RMDs – Best time to take during the year?

Post by duffer » Thu Jul 30, 2020 6:51 pm

kaneohe wrote:
Thu Jul 30, 2020 6:18 pm
duffer wrote:
Thu Jul 30, 2020 5:51 pm
ee_guy wrote:
Thu Jul 30, 2020 4:56 pm
Gains inside a IRA is taxed when withdrawn at ordinary tax rates. If the RMD is invested outside the IRA capital gains tax rate is lower. In this situation, taking RMD earlier is preferred.
I do not have a detailed familiarity with the tax and withholding rules for RMDs. So I ask to be checked on the following:

If taxes on the RMD are not due until April 15th of the following year, then the best thing to do would be to withdraw your RMD on January 1st (preferably without withholding any taxes, if that is permitted???) and reinvest it all immediately in a taxable account. Gains for the RMD within that account during the year would be taxed at the capital gains rate rather than at the ordinary income rate.

Is the above correct?
In the absence of more info, IRS assumes income is distributed evenly during the yr so you would owe 4 equal estimated tax payments for the RMD taken Jan 1.
Thank you for the additional information. So that would work fine--the taxes could continue to be invested in the taxable account until each estimated tax payment were due. Does the rest of what I suggested make sense to you?

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Re: RMDs – Best time to take during the year?

Post by sport » Thu Jul 30, 2020 8:00 pm

duffer wrote:
Thu Jul 30, 2020 5:51 pm
ee_guy wrote:
Thu Jul 30, 2020 4:56 pm
Gains inside a IRA is taxed when withdrawn at ordinary tax rates. If the RMD is invested outside the IRA capital gains tax rate is lower. In this situation, taking RMD earlier is preferred.
I do not have a detailed familiarity with the tax and withholding rules for RMDs. So I ask to be checked on the following:

If taxes on the RMD are not due until April 15th of the following year, then the best thing to do would be to withdraw your RMD on January 1st (preferably without withholding any taxes, if that is permitted???) and reinvest it all immediately in a taxable account. Gains for the RMD within that account during the year would be taxed at the capital gains rate rather than at the ordinary income rate.

Is the above correct?
Taking the RMD at the beginning of the year would preclude making QCD donations. QCDs are a very good tax benefit, especially if you were going to make donations anyway.

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Re: RMDs – Best time to take during the year?

Post by Naikansha » Thu Jul 30, 2020 11:01 pm

I take my RMD in late January or February from my tIRA with federal tax withdrawn and QCD donations made (the later are NOT precluded in January; I agree they are a very good tax benefit). Balance is put in my taxable account. I had excellent experience this year with the Vanguard assistants. As you may know, VG sends checks made out to the donor-specified charities to the donor who passes them on by mail. It may take some time to receive confirmations. This year no problems. But in case of a problem, I try to stay away from Vanguard during tax season or at the end of the year when they are most busy.

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Re: RMDs – Best time to take during the year?

Post by RetiredAL » Fri Jul 31, 2020 2:29 am

Don't wait until late in the year. One year we got burned by my Dad's RMD not completing as scheduled.

For years, my Dad's RMD was taken out monthly at the end of the month. In 2018, Dad's Advisor left the Wells Fargo platform the end of Sept. The decision was made to not follow him to Lincoln Financial. We were told the accounts would be converted to a Wells Trade Accounts. I had no trouble changing the Trust Account to Wells Trade via a phone call, but his 2 IRAs became problematic remaining as Advisor Accounts in spite of phone calls and paperwork submissions. With no active advisor assigned, the auto monthly RMD's stopped due to no redemption of holdings to cash so, no RMD. We noticed the lack of the RMD transfer at the end of Oct early in November and made several phone calls where every agent said they could fix RMD stoppage, but the RMD transaction never occurred. Then my Dad got hospitalized just before Christmas then to a nursing facility for a while. Without my Dad there on the phone to Wells Fargo, that's when I found out "their computer" did not list me as POA, even though his advisor had recognized me as POA for 6 years.

After a 2 month long POA battle with Wells, where they kept rejecting the POA paperwork for this, then that, the solution was to open an IRA Account at Schwab and have Schwab transfer the IRAs to Schwab to get the RMD's started again. Schwab was ok with me opening the IRA as POA, but by that time my Dad had improved enough to be able to go the the Schwab Office to sign for himself. Being short on the RMD $ in 2018, I had to request a waiver to the penalty, which was granted.

So all of his 2019 RMD was taken by April, and this year, I took it all in Jan, partly so as not get burned again, partly to have it done if he passes - he is a very old man with multiple issues.

On the personal side, the angst related to a messed up RMD issue is pretty significant. In the big picture, it hardly matters as to whether Jan or Dec. Don't set yourself up for misery if there is a hiccup.

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colodane
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Re: RMDs – Best time to take during the year?

Post by colodane » Fri Jul 31, 2020 7:43 pm

I take the RMD as a one-time transfer. I used to do it on April 1. But I'm skipping this year entirely since we are not required to take a distribution.

Starting in 2021, I'm moving my one-time transfer to sometime in December to remain flexible in the event of another opportunity to forgo a yearly RMD.

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Re: RMDs – Best time to take during the year?

Post by bertilak » Sat Aug 01, 2020 6:54 am

I take them in January.
  1. I hate leaving important things for later.
  2. Yes, time in the market is important, but if an RMD is instantly reinvested it remains "in the market."
  3. OK, if you withhold taxes that's some money that is no longer in the market. I say "small potatoes! At least it's not hanging over me for a year." (See number 1.)
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Re: RMDs – Best time to take during the year?

Post by HANK1964 » Sat Aug 01, 2020 2:01 pm

Over the years I always took my RMD on the first trading day of the year. I would over withhold both federal and state income taxes. I would then do Roth conversions over the remainder of the year but always checking to make sure I stayed within the desired tax bracket while knowing I already had sufficient withholding to handle the taxes due on the conversions. I built an Excel spreadsheet that emulates the federal and state tax returns and track my tax situation throughout the year. I update the deduction, bracket, etc info annually as soon as it becomes available through Forbes or Oblivious Investor.

Since there is no RMD this year it is a great year to convert. My girlfriend will be able to convert about $14,000.00 this year and owe no federal taxes because her standard deduction alone will exceed the amount being converted. If she is able to itemize she can convert even more. Great deal.

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Re: RMDs – Best time to take during the year?

Post by Dandy » Sun Aug 02, 2020 6:27 am

we are fortunate not to need the RMD to fund normal expenses. I take it in January with ample Federal and State taxes taken out. This precludes the need for submitting estimated taxes during the year. Also allows us to gift much of it to our children as "early inheritance" early in the year.

I also like to take it early to make sure it is done --should I be ill or die and my non investment savvy spouse/heirs won't forget to take it and have other issues. I use the VG automated process so even I don't have to take any specific action each year.

In theory taking it later should result in higher TIRA balances over time. My TIRA allocation is about 22/78 so I don't get much equity driven growth in that account. I rely on our taxable account for that.

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