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Hello - I am new. I have a question.
Old 06-28-2019, 07:13 AM   #1
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Hello - I am new. I have a question.

I am 60 years old. I am new to this web site. I am retired from the practice of law. I practiced for more than 25 years. I have a question about required minimum distributions. The way I understand rmds is that you take you life expectancy off the irs table and divide that into your retirement account balance as of 12/31 of the previous year and you pay tax on the result. So for example, let's say ten years ago you invested $100,000 into your retirement account. Let's say it time for a rmd. The value of the account as of 12/31 of last year is $180000. Let's say my life expectancy according to the irs table is 30 years. I would divide $180000 by 30 and get $6000. I would include the $6000 into my ordinary income on my tax return. My question is as follows: How come there is no reduction for the $100000 basis you had in the retirement account? Your true gain is $80000 ($180000 less $100000). Shouldn't $80000 be divided by 30 years to get the amount included in ordinary income? It appears as there is no reduction for your basis you had in the investment and are paying taxes not only on your true gain but also your basis, the amount you invested. Is this correct?
Thanks,
John
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Old 06-28-2019, 07:22 AM   #2
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You have it almost right.

You're not dividing your remaining years into your IRA balance, but rather the specific number in the IRS table for your age. Not a huge difference, but a difference.

What you're missing is that you pay the taxes now on the entire amount withdrawn because you didn't pay tax on the money you put in the IRA (that's the "deferred" part of the matter). So you pay the tax on that money now along with the tax on the gains.
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Old 06-28-2019, 07:28 AM   #3
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You must actually WITHDRAW the amount from the retirement account. At that point, assuming it was a tax deferred account, it ALL becomes current income regardless of cost basis.
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Old 06-28-2019, 07:29 AM   #4
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Originally Posted by braumeister View Post
You have it almost right.

You're not dividing your remaining years into your IRA balance, but rather the specific number in the IRS table for your age. Not a huge difference, but a difference.

What you're missing is that you pay the taxes now on the entire amount withdrawn because you didn't pay tax on the money you put in the IRA (that's the "deferred" part of the matter). So you pay the tax on that money now along with the tax on the gains.
+1
but there is more. You need to apply the basis pro-rata on each withdraw.


bw5972 -- I don't assume a zero tax basis. The rules early on did not allow some of the manipulations that you can do today. So I am stuck dealing with it. But cost basis is not an issue.
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Old 06-28-2019, 09:21 AM   #5
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Quote:
Originally Posted by mbjg0788 View Post
I am 60 years old. I am new to this web site. I am retired from the practice of law. I practiced for more than 25 years. I have a question about required minimum distributions. The way I understand rmds is that you take you life expectancy off the irs table and divide that into your retirement account balance as of 12/31 of the previous year and you pay tax on the result. So for example, let's say ten years ago you invested $100,000 into your retirement account. Let's say it time for a rmd. The value of the account as of 12/31 of last year is $180000. Let's say my life expectancy according to the irs table is 30 years. I would divide $180000 by 30 and get $6000. I would include the $6000 into my ordinary income on my tax return. My question is as follows: How come there is no reduction for the $100000 basis you had in the retirement account? Your true gain is $80000 ($180000 less $100000). Shouldn't $80000 be divided by 30 years to get the amount included in ordinary income? It appears as there is no reduction for your basis you had in the investment and are paying taxes not only on your true gain but also your basis, the amount you invested. Is this correct?
Thanks,
John
I guess to begin with I want to make sure that you know that you are not required to take distributions until the year you turn 70 1/2.

Did you take deductions for the $100,000 as you contributed it? If so, then you have never paid tax on that income and that is why 100% of the amount that you withdraw is ordinary income.

OTOH, if you didn't get a tax deduction for contributions or only a portion of contributions were deductible, then a portion of your withdrawal is income and a portion is a return of capital.

Quote:
A simple example should make it clearer. Say you contribute $5,000 to a nondeductible IRA. Over the course of five years, it grows to $8,000. You retire and take a distribution of $2,000. To figure out how much is taxable, you can see that $5,000 out of $8,000 in the account came from the original contribution, which works out to five-eighths of its total value. So five-eighths of $2,000, or $1,250, will be free of tax. The remaining $750 represents the three-eighths of the account that came from income and gains, and it gets included in your taxable income.

https://www.fool.com/knowledge-cente...istributi.aspx
Below is the RMD table:
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Old 06-28-2019, 10:05 AM   #6
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The way the law stands, at age 70 you will need to withdraw 100/27.4 or 3.65% of the total year end balance of your accounts.

In my wife's case, Fidelity and TIAA/CREF sent her a letter telling her how much to withdraw.

The amount changes every year--like a moving target. Since we don't have anything to do with the funds, my wife's withdrawal is taking her and her daughter to London-Paris-Barcelona. She says the daughter's going to get it anyway, and she wants them both to have some fun out of it.
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Old 06-28-2019, 09:58 PM   #7
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Also avoid this mistake, which can lead to having double withdrawals in a single tax year. https://www.investopedia.com/article.../04/120604.asp
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Old 06-29-2019, 04:59 AM   #8
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They want the taxes on the entire RMD, including the basis as it has been tax deferred.
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Old 06-29-2019, 06:59 AM   #9
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^^^ It depends. See post #5.
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Old 06-29-2019, 07:28 AM   #10
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^^^ It depends. See post #5.
Correct. And just to re-iterate for clarity: the rmd and the taxes are two separate issues. The rmd is a mandatory yearly distribution after age 70 1/2 and is calculated as described above by using the IRS tables.
The taxes will depend on the type of IRA (taxdeferred or taxed). If it is a tax deferred account (I.e. you funded it with pre-tax money and took a deduction when you contributed) then the entire rmd is taxable. If it is an IRA that was funded with after-tax money, then you only owe taxes on the gains.

Also worth mentioning: Roth IRAs are not subject to rmd

Finally, most financial institutions these days will calculate and execute the rmd for you and will provide the necessary tax info, but if they do not, then you are on the hook to figure it out yourself. And as someone already mentioned, the rmd isn’t just about paying taxes. You have to physically remove that amount from your IRA account. The point is that Uncle Sam wants you to spend down your IRA so he can collect the deferred taxes ASAP.
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Old 06-29-2019, 07:29 AM   #11
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I "think" the crux of the OP's question is more about qualified versus unqualified contributions (after tax or before tax). If the $100,000 originally invested in an IRA was after tax, a basis calculation should come into play. If it was a before tax contribution which 99% are, then there is no real basis.

However, consider the "non-deductible IRA". For those of us who used contributions to a non-deductible IRA as an add on means to further tax defer growth, we complicated the calculation for ourselves. Some portion of my withdrawal across all of my IRA's will not be taxed.

At the time I started contributing to a Non-Deductible IRA, I thought I could use JUST that bucket of money and convert it all to a Roth at some point in the future if I ever qualified to do so-Or take withdrawals from it with very little tax consequence. Little did I know a the time, that ANY withdrawal has to be spread across all of my IRA's (3 of them-A Roll-Over, A Simple and a Non-Deductible). ugh!
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Old 06-29-2019, 07:31 AM   #12
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I guess to begin with I want to make sure that you know that you are not required to take distributions until the year you turn 70 1/2.
Your first RMD must be taken by April 1 of the year after you turn 70.
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Old 06-29-2019, 07:35 AM   #13
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Your first RMD must be taken by April 1 of the year after you turn 70.
Good point...I worded it poorly.
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Old 06-29-2019, 07:39 AM   #14
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Also worth mentioning: Roth IRAs are not subject to rmd
That's true for the lifetime of the original owner.

But, Roth IRAs are subject to RMD rules after the death of the owner of the Roth IRA.
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Old 06-29-2019, 07:41 AM   #15
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Good point...I worded it poorly.
The whole 'April 1 of the year after you turn 70' rule is perhaps the most foolish rule I have seen. I don't get the point. Seems like a bad April Fool joke.
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