RMD Tip

[charlie]

Sometimes it takes a 2x4 upside the head for the obvious to
sink in.

The other day while studying the tax effects of converting
a Traditional IRA to a ROTH, it dawned on me that the
advise of using after-tax money to pay the tax due on
the ROTH conversion ALSO APPLIES TO PAYING THE TAX
ON RMDs. Talk about a "duh" moment.

Since this is an early retiree board, most of you have not
entered the RMD phase (except maybe Jarhead), but please
pass this tip on to your parents:

Don't let the financial institution withhold tax. Pay the tax
out of savings, if possible. This will help your IRA live longer.

Cheers,

Charlie

 

[db]

Charlie,

This is the first year of RMD on my own IRA, but I have been taking an RMD on an IRA I inherited from my dad for several years now.

Not having the financial instutuition withhold taxes has at least two other benifits as well:  (1) It lets you keep the money until the followng April 15th, rather than having the IRS hold it, and (2) it simplifies your return, because you are not trying to predict the amount to be withheld.

db 

 

[retire@40]

I'm not sure I understand.  Isn't the RMD a set amount?  What difference is there whether there are withholdings or not?

 

[charlie]

retire@40,

Maybe I'm having a brain phart. It is true that an RMD is an RMD
and your remaining IRA is the same if you pay taxes with money
from the IRA or using after tax money.

In my case, I need to draw out MORE than the required minimum
for living expenses. I can reduce the distribution amount by
paying the tax from savings, thus prolonging the life of the IRA.

For example, suppose my RMD is $10,000 per year but I need to
draw $12,000 for living expense. At a 10% tax rate, I would
need to draw about $13,333 to net $12,000 after tax.

Of course, it would be better to reduce the distribution to the RMD
amount, but I don't want to draw down my savings too fast ........

It's a judgment call, really.

Cheers,

Charlie

 

[SteveR]

Maybe I am missing something but RMD is the MINIMUM you have to take rather than the maximum you can take out. I would think the Gov. would be more than happy for you to take out as much as you like since they get your tax money now.

 

[cute fuzzy bunny]

Let me try to explain what I think charlie is saying. Its about 30 years before I hit RMD, so I'll have to look at it again in a couple of decades.

Lets say your minimum RMD is 100. From an IRA thats considered ordinary income, so under normal circumstances the brokerage (say vanguard) withholds for you for that 100 withdrawal...say the withholding is 10 bucks. They'd withdraw THAT from your IRA to cover. So your withdrawal is 110-112 bucks. You tell them NOT to do that, pay the ten bucks out of your taxable account, and only take 100 out instead of 110.

Only problem with that is if under withholding causes you to have to pay penalties for the under withholding. Probably not hitting the numbers needed for that to kick in on you though.

 

[SteveR]

Only problem with that is if under withholding causes you to have to pay penalties for the under withholding.  Probably not hitting the numbers needed for that to kick in on you though.

The possible under withholding can be addressed through estimated payments quarterly. Use your after tax $$ for this to save the IRA nest egg. I noticed that my Money program does this a part of the Life Time planner so it must be right.

 

[retire@40]

Ok, you are taking an amount higher than the RMD because you choose to do so and/or you need to. That makes sense.

But for those who are just taking the RMD, not because they need the money, but because they have to take at least that minimum amount, it doesn't matter whether there are withholdings or not.

 

[cute fuzzy bunny]

Well, yes there is, if they dont want to take more than the minimum.