RMD nuts and bolts

[larrytbm]

Turning 70 next year (2018), so RMD is near and I want to see if I have all the details. tIRA value will be based on assets as of December 31st of this year. And the calculated amount must be withdrawn by April 1st of 2019 ( I guess in order to be reported on 2018 tax return). Please correct me if this is not right.

I was hoping the 1st year would be an adjusted amount based on the number of days over age 70-1/2 but that doesn't seem to be the case.

Anything I'm missing?

 

[travelover]

I believe that if you wait until after the first of the year to take the first payment, you end up having to take two payments in the same tax year.

 

[growing_older]

Correct. If you delay the 2018 RMD to April of 2019, you will still have to take the 2019 payment in 2019. Only the first year can be delayed to April of the following year.

Also turning 70 in 2018 isn't the trigger, it's turning 70.5 that requires RMD. So depending on where in 2018 your birthday falls will determine whether you have an RMD for 2018 or not.

 

[ejman]

Correct. If you delay the 2018 RMD to April of 2019, you will still have to take the 2019 payment in 2019. Only the first year can be delayed to April of the following year.

Also turning 70 in 2018 isn't the trigger, it's turning 70.5 that requires RMD. So depending on where in 2018 your birthday falls will determine whether you have an RMD for 2018 or not.

I always get confused about this. My wife's 70th birthday is on November 2018. So when ( in what year) does she have to withdraw the RMD so that 2 withdrawals in one year are not incurred? And what date IRA balance is that calculated on?

 

[REWahoo]

My wife's 70th birthday is on November 2018. So when ( in what year) does she have to withdraw the RMD so that 2 withdrawals in one year are not incurred?

2019.

She could wait until April 1, 2020 to take her first RMD but will also be required to take her second RMD by December 31, 2020 regardless of when she takes her first RMD.

And what date IRA balance is that calculated on?

December 31, 2018

 

[SecondCor521]

^
<pedantic>
...December 31, 2020...
</pedantic>

 

[larrytbm]

I believe that if you wait until after the first of the year to take the first payment, you end up having to take two payments in the same tax year.

Wouldn't the second withdrawal need to be based on the account balance on Dec. 31st of the second year (i.e.) 2018 and therefore still be acceptable prior to April 1st of 2020 and reported on the 2019 tax return?

 

[REWahoo]

Wouldn't the second withdrawal need to be based on the account balance on Dec. 31st of the second year (i.e.) 2018 and therefore still be acceptable prior to April 1st of 2020 and reported on the 2019 tax return?

Only the first RMD can be delayed unti April 1. Thereafter (from the IRS website):

For each subsequent year after your required beginning date, you must withdraw your RMD by December 31.

 

[beowulf]

Another RMD question. If I understand the process correctly, you take the balance of all your IRAs as of December 31 and use one of the calculators available to determine your RMD. Then you can withdraw that amount from one account or a combination of accounts. Roth IRAs are not included.

What about traditional, non-deductible IRAs? I think they are included with all your other IRAs, but I can't find anything that definitely states that. I have been filing form 8806 for many years, so I am good in that regard.

Any help is appreciated.

 

[growing_older]

traditional, non-deductible IRAs

They are all included together when figuring the RMD (excluding Roth). Then the percentage of basis in traditional non-deductible IRA compared to total IRA value (excluding Roth) is how much of the RMD is taxable.

 

[beowulf]

They are all included together when figuring the RMD (excluding Roth). Then the percentage of basis in traditional non-deductible IRA compared to total IRA value (excluding Roth) is how much of the RMD is taxable.

I understand that the tax on the non-deductible portion is determined on the 8806. That's pretty straightforward and I've been doing that for several years.

For the RMD itself, without worrying about taxes, it looks like my assumption that you include the value of all IRAs in the calculation (except Roth).

 

[Sunset]

......

For the RMD itself, without worrying about taxes, it looks like my assumption that you include the value of all IRAs in the calculation (except Roth).

Yes.

 

[Badger]

My wife turns 70 in a few days (Jan 2017). So she will be taking her RMD this year and the amount will be based on Dec 31, 2016 and then for each future year based on the previous year. She wants to make the withdrawal at the beginning of each year to get it out of the way and have the funds to work with throughout that year. If calculations were based on Dec 31, 2017 the she wouldn't know the correct amount until the end of the year. This would be a pain in the neck. Don't want to incur any penalties. All her IRAs are invested with Vanguard and they should be making the calculations with the correct numbers and notifying her but I would feel more comfortable with a few verifications.

I won't turn 70.5 until 2019 so mine should be based on Dec 31, 2018.

I think I have this right. I'm sure not looking forward to paying a lot more taxes by then.

Cheers!

 

[braumeister]

One more little wrinkle I usually bring up because it's not widely known:

To avoid making estimated tax payments quarterly, you can have your entire expected tax bill withheld from your RMD. The IRS treats anything withheld as if it had been paid evenly throughout the year. For those who don't need the money to live on, it could be advantageous to take that RMD and withholding in December, so the money keeps earning for you throughout the year.

 

[ERD50]

One more little wrinkle I usually bring up because it's not widely known:

To avoid making estimated tax payments quarterly, you can have your entire expected tax bill withheld from your RMD. The IRS treats anything withheld as if it had been paid evenly throughout the year. For those who don't need the money to live on, it could be advantageous to take that RMD and withholding in December, so the money keeps earning for you throughout the year.

My MIL's tax accountant (they've used him since when they had their own business, and just continued afterwards) has her take her RMD in Q4. I always kind of wondered about that, so now I'm sure that is the reason - good point! I'll plan to do that when the time comes.

-ERD50

 

[eytonxav]

My birthday in in the later part of June, so do I have to take a RMD that year, and what happens if you have been taking monthly distributions during that same year; do you just net the difference between the RMD and what you took out already and owe that amount by the end of the year?

 

[MissMolly]

If your birthday is in June, then you turn 70 1/2 in December, so yes, you would be required to take an RMD that year. Any money withdrawn from the IRA or 401K during the year in which you turn 70 1/2 counts towards your RMD.

 

[eytonxav]

If your birthday is in June, then you turn 70 1/2 in December, so yes, you would be required to take an RMD that year. Any money withdrawn from the IRA or 401K during the year in which you turn 70 1/2 counts towards your RMD.

Thanks, thats what I thought.

 

[ejman]

One more little wrinkle I usually bring up because it's not widely known:

To avoid making estimated tax payments quarterly, you can have your entire expected tax bill withheld from your RMD. The IRS treats anything withheld as if it had been paid evenly throughout the year. For those who don't need the money to live on, it could be advantageous to take that RMD and withholding in December, so the money keeps earning for you throughout the year.

But, assuming one is invested in stock/bond funds that drop a lot in value during the year (such as 1987, 1990, 2002, 2008 etc), wouldn't this result in selling more shares to cover the RMD liability than if one had sold on Jan 1?

 

[braumeister]

But, assuming one is invested in stock/bond funds that drop a lot in value during the year (such as 1987, 1990, 2002, 2008 etc), wouldn't this result in selling more shares to cover the RMD liability than if one had sold on Jan 1?

That's why I said it could be advantageous. YMMV.

 

[ERD50]

But, assuming one is invested in stock/bond funds that drop a lot in value during the year (such as 1987, 1990, 2002, 2008 etc), wouldn't this result in selling more shares to cover the RMD liability than if one had sold on Jan 1?

Sure, just let me know each year in January if stocks are going to be lower in the future 4th quarter, and I'll act accordingly.

But since on average, the market goes up (or we would be foolish to have any money in the market), waiting until 4th quarter should make sense, and can be convenient to cover tax liabilities.

-ERD50

 

[ejman]

Sure, just let me know each year in January if stocks are going to be lower in the future 4th quarter, and I'll act accordingly.

But since on average, the market goes up (or we would be foolish to have any money in the market), waiting until 4th quarter should make sense, and can be convenient to cover tax liabilities.

-ERD50

Yes, it would be wonderful to be able to predict which way the market moves. I guess this would depend on one's basic approach to these things. For example this year, with the stock market at an all time high, and so much fun stuff going on I would be tempted to sell in January if I had to take an RMD this year. Sounds like you would do the opposite. Exactly what makes this so much fun!

 

[travelover]

One more little wrinkle I usually bring up because it's not widely known:

To avoid making estimated tax payments quarterly, you can have your entire expected tax bill withheld from your RMD. The IRS treats anything withheld as if it had been paid evenly throughout the year. For those who don't need the money to live on, it could be advantageous to take that RMD and withholding in December, so the money keeps earning for you throughout the year.

Wow, is this for sure true? If one is not yet into RMDs, could one just take an IRA withdrawal and have the year's taxes withheld from it to the same effect?

 

[Taxman59]

But, assuming one is invested in stock/bond funds that drop a lot in value during the year (such as 1987, 1990, 2002, 2008 etc), wouldn't this result in selling more shares to cover the RMD liability than if one had sold on Jan 1?

I had the opportunity to compare the early in the year vs late in the year question during my career. We had charitable trusts that made on payment per year, in Dec., based on the prior year FMV. Our president was also the primary investment guy, and he hated the thought of losing the year of investment returns if we raised cash in Jan. After several years, we showed him the analysis that the "lost" returns in an up year compared to the savings if the market went down (selling more shares that are at a lower price for the same $$). The lost return on an annual 6% withdrawal was about 5% of the annual return, but the additional loss in a down year was about 2X the overall loss. Take the money in Jan, and sleep well all year.

 

[Katsmeow]

Isn't it the case that any taxes paid from any IRA withdrawal (whether an RMD) or not are treated as if they were evenly withheld throughout the year? I seem to recall having read that, but don't know if that has changed.