Income tax considerations for RMD timing

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fermata
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Income tax considerations for RMD timing

Post by fermata » Thu Jan 16, 2020 12:10 pm

Apologies if this has been asked and answered. My situation is this: I have 3 income streams 1) pension, 2) social security, 3) rmd (just started). A friend advised that I take my federal tax withholding from my pension and rmd @25% each and take zero withholding from SS. I've run the numbers and doing that allows me to meet my income tax obligations for the year. Now I'm in the process of trying to figure out when to take the RMD, but my question is: if I decide to take the entire RMD at the end of the year, that means I won't be paying the IRS a big chunk of change until then. Will the IRS make me pay quarterly taxes since they won't be getting that revenue throughout the year under this scenario, or worse, will they penalize me for waiting? (p.s. One of the reasons why I don't want to withhold from SS is because the SSA makes it so difficult to make changes, so the less I mess with it, the better.)

I know there are a lot of opinions about "when" to take RMD's, but my question here is only about the scenario I mentioned, i.e., taking it at the end of the year. Thanks!

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ResearchMed
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Re: Income tax considerations for RMD timing

Post by ResearchMed » Thu Jan 16, 2020 12:16 pm

fermata wrote:
Thu Jan 16, 2020 12:10 pm
Apologies if this has been asked and answered. My situation is this: I have 3 income streams 1) pension, 2) social security, 3) rmd (just started). A friend advised that I take my federal tax withholding from my pension and rmd @25% each and take zero withholding from SS. I've run the numbers and doing that allows me to meet my income tax obligations for the year. Now I'm in the process of trying to figure out when to take the RMD, but my question is: if I decide to take the entire RMD at the end of the year, that means I won't be paying the IRS a big chunk of change until then. Will the IRS make me pay quarterly taxes since they won't be getting that revenue throughout the year under this scenario, or worse, will they penalize me for waiting? (p.s. One of the reasons why I don't want to withhold from SS is because the SSA makes it so difficult to make changes, so the less I mess with it, the better.)

I know there are a lot of opinions about "when" to take RMD's, but my question here is only about the scenario I mentioned, i.e., taking it at the end of the year. Thanks!
Any Fed taxes paid using *withholding* (be it from SS, salary, RMD, etc.) is deemed to be timely no matter when paid (assuming within the right calendar year).
So one could withdraw a very large amount from an IRA, and pay an entire year's taxes by withholding almost all of it in, say, November. (waiting until late December leaves a bit too much room for some sort of delay...)

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sport
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Re: Income tax considerations for RMD timing

Post by sport » Thu Jan 16, 2020 12:25 pm

ResearchMed wrote:
Thu Jan 16, 2020 12:16 pm
So one could withdraw a very large amount from an IRA, and pay an entire year's taxes by withholding almost all of it in, say, November. (waiting until late December leaves a bit too much room for some sort of delay...)
This is exactly what I have been doing. There have not been any problems.

Topic Author
fermata
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Re: Income tax considerations for RMD timing

Post by fermata » Thu Jan 16, 2020 1:48 pm

Thank you for your reply. I googled quite a bit on this but couldn't find anything on-point. Now I'm considering not taking any withholding from my pension (if my company will allow it) and just taking a bigger percentage from the RMD at the end of the year, or in November as you suggest.

Of course, this brings up the whole question of RMD timing in general. Many people suggest taking it at end of year to maximize the investment value of the assets, which makes the huge assumption that assets will increase in value. Others suggest taking it all early and investing it in a regular retail/taxable account where, if invested in, say, muni bonds, or held in equities long term, the tax consequences would be less severe, whereas any growth within the IRA is ultimately going to be taxed as regular income. My conservative nature would like to safeguard the RMD in tax-advantaged asset classes in a taxable account, probably muni bond funds/etfs. Which makes moot the whole point of my original question. But I just wanted to make sure I understand the implications, taxes and otherwise, on the choice I make.

sport
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Re: Income tax considerations for RMD timing

Post by sport » Thu Jan 16, 2020 1:52 pm

If you want to make QCD donations (you must be at least 70.5 on the day of the donation) and have those donations count towards your RMD, you have to make the donations before you have completed the RMD. So, if you want to make QCDs at various times during the year, you want to have at least some of your RMD still available to make those donations.

Alan S.
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Re: Income tax considerations for RMD timing

Post by Alan S. » Thu Jan 16, 2020 2:55 pm

RMD timing issues should be based on practical considerations such as:

1) Using the first RMD deferral option to your advantage when determining whether to defer, defer a portion, or none. Your projected taxable income in both the first and second RMD years should be considered. This option applies only to your first RMD year for the plan.

2) Tax payment strategy such as withholding v. quarterly estimates and the advantage of how withholding is allocated across the year.

3) QCD timing issues to avoid not being able to apply all your QCDs to the RMD.

4) Avoiding the risk of being late. Note that while the IRS will almost always waive the penalty, having the late RMD added to the next year's RMD can spike your marginal rate in the distribution year and cost you. Or not completing your RMD in the year of death becomes an administrative and perhaps costly tax issue for your beneficiary.

5) Such things as market timing and generating the income in the IRS v. outside the IRA by distributing early in the year do not work consistently. May work well in one year and backfire the next.

NOTE: I agree with your opinion on SS withholding, They are too slow to act and probably more error prone than other withholding sources, so should probably be last priority for withholding sources.

Topic Author
fermata
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Re: Income tax considerations for RMD timing

Post by fermata » Fri Jan 17, 2020 9:25 am

Alan S. wrote:
Thu Jan 16, 2020 2:55 pm
RMD timing issues should be based on practical considerations such as:

1) Using the first RMD deferral option to your advantage when determining whether to defer, defer a portion, or none. Your projected taxable income in both the first and second RMD years should be considered. This option applies only to your first RMD year for the plan.

I should have been clearer about when my RMD's started. I had to take it in 2019. I knew that I had the option to wait until the 2020 tax filing deadline but decided to take it all by end of 2019. I'm a little unclear, though, about tax implications if I had taken it in 2020 but before tax filing. Are you saying that any amount withdrawn between 1/1/2020 and 4/15/2020 would be considered income for 2020, not 2019? If that's true, then I'm glad I took it in 2019.

2) Tax payment strategy such as withholding v. quarterly estimates and the advantage of how withholding is allocated across the year.

At this point, I'm inclined to take quarterly withdrawals using withholding and not getting into making estimated quarterly payments.

3) QCD timing issues to avoid not being able to apply all your QCDs to the RMD.

I hadn't even thought about QCD's until mentioned by a previous reply. I'll start reading up on how that works.

4) Avoiding the risk of being late. Note that while the IRS will almost always waive the penalty, having the late RMD added to the next year's RMD can spike your marginal rate in the distribution year and cost you. Or not completing your RMD in the year of death becomes an administrative and perhaps costly tax issue for your beneficiary.

Yes, I certainly don't want to be begging the IRS to forgive a mistake. And, your point about year of death is a compelling reason to take it early in the event of my, ah hem, early demise. :(

5) Such things as market timing and generating the income in the IRS v. outside the IRA by distributing early in the year do not work consistently. May work well in one year and backfire the next.

I'm glad you used the phrase market timing, because I can see how my concern about a rising or falling market and what kind of account the funds are in is really just that. If I want to be safe, I can be in high quality bonds in qualified accounts or muni bond funds in a taxable account. This brings up the magi issue as it relates to Medicare premiums. No matter what I do, I'll be pushing Medicare premium brackets.

NOTE: I agree with your opinion on SS withholding, They are too slow to act and probably more error prone than other withholding sources, so should probably be last priority for withholding sources.

I know, really? And they keep talking about going paperless, which I did, to the extent they allow it, and then they send the 2019 1099 via USPS.

Thanks for your very helpful reply.

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