RMD Workaround?

[marko]

Slow day at the marko household. This is just a theoretical/academic question.

As I understand it, you can withdraw from you IRA, pay no tax at withdrawal and if you return it to the IRA within 60 days there's no tax or penalty.

What would prevent you from withdrawing your RMD amount mid December, satisfying the IRS and then returning it to your IRA mid January? My take is that the IRS only looks for the RMD amount withdrawn, not the taxes paid. If that's not so, then the whole plan is moot. Just asking, not advocating anything.

 

[RetiredHappy]

The 2 issues here are that
- Any withdrawal is used to meet RMD first, and reported to IRS for your tax year.
- The following year is a new year and you cannot "contribute" to IRA even though you are trying to "return" the money to IRA.

 

[Kings over Queens]

the taxes are generated by the 1099 that they issue, unless, the financial institution automatically withholds, and I don't know if they do or don't.

take in December (1099 issued) and put it back in January. Great. I don't think you can take a deduction for the deposit, right? I don't know if the IRS cares about the value of the account, which is now larger because of growth, driving a larger rmd (in theory)

the 1099 thwarts your evil plan.

 

[Kings over Queens]

- The following year is a new year and you cannot "contribute" to IRA even though you are trying to "return" the money to IRA.

Can the "contribution" be made but without any favorable tax treatment? I don't know.

It wouldn't be a good idea, in my view.

Just wondering if cannot is actually should not.

 

[marko]

the taxes are generated by the 1099 that they issue, unless, the financial institution automatically withholds, and I don't know if they do or don't.

take in December (1099 issued) and put it back in January. Great. I don't think you can take a deduction for the deposit, right? I don't know if the IRS cares about the value of the account, which is now larger because of growth, driving a larger rmd (in theory)

the 1099 thwarts your evil plan.

You're right. While you can choose the tax percentage paid, the 1099 will still show an amount withdrawn and taxes calculated from that.
Gotta stop day-drinking.

 

[SecondCor521]

Besides the 1099 and taxes, I'm sure funds withdrawn for RMD purposes are not eligible for rollover contribution in January. I'm not sure offhand what the penalties are for that.

As a secondary issue, RMDs are an increasing percentage of the account balance, so even if you could put money back, it'd just raise all your future RMDs.

 

[Kings over Queens]

Gotta stop day-drinking.

Lets not overreact. ?

 

[RetiredHappy]

Gotta stop day-drinking.

Still drinking my morning tea.

 

[TheWizard]

the taxes are generated by the 1099 that they issue, unless, the financial institution automatically withholds, and I don't know if they do or don't.

take in December (1099 issued) and put it back in January. Great. I don't think you can take a deduction for the deposit, right? I don't know if the IRS cares about the value of the account, which is now larger because of growth, driving a larger rmd (in theory)

the 1099 thwarts your evil plan.

Right.
Let's say he could do that rollover back into the tIRA.
And let's assume his RMD was $50,000 and his marginal tax rate is 32%.

So he pays $16,000 in Federal tax on this year's RMD, puts the $50k back into tax-deferred, and then pays ANOTHER $16K in Federal income tax when that money is eventually withdrawn a second time.

So why on earth would anyone want to put liberated money back into tax-deferred?

 

[GrayHare]

The IRS might not catch on immediately, but eventually I suspect they would say your proposed sequence was an intent to avoid paying tax on RMDs. This would be accompanied by a demand for payment of tax.

 

[TheWizard]

The IRS might not catch on immediately, but eventually I suspect they would say your proposed sequence was an intent to avoid paying tax on RMDs. This would be accompanied by a demand for payment of tax.

I thought we already said he'd be getting a 1099-R for the withdrawal of the RMD amount...

 

[Gumby]

You can only contribute to an IRA (traditional or Roth) money that was received as compensation (defined in publication 590). Money distributed from a tIRA due to the RMD requirement is not compensation.

Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service

www.irs.gov

 

[SecondCor521]

You can only contribute to an IRA (traditional or Roth) money that was received as compensation (defined in publication 590). Money distributed from a tIRA due to the RMD requirement is not compensation.

Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service

www.irs.gov

Also not eligible for rollover, as I suspected:

"Distributions not eligible for rollover. Amounts that must be distributed (required minimum distributions) during a particular year aren't normally eligible for rollover treatment."

From IRS Pub 590-B where it talks about RMDs (page 6 in the 2023 version).

 

[harllee]

We avoid taxes on our RMDs by making distributions to charities using from our IRAs

 

[cathy63]

I thought we already said he'd be getting a 1099-R for the withdrawal of the RMD amount...

Just because you receive a 1099-R doesn't mean that you have to pay tax on the amount withdrawn. When a withdrawal is taken from an IRA, then the "taxable amount not determined" box on the 1099-R will be checked. That means some or all of the amount withdrawn might be taxable, but the custodian doesn't know how much. When you do your taxes, it is your responsibility to determine the correct taxable amount and enter it on line 4b of your 1040. If you do a rollover on your own (not trustee-to-trustee), then you just enter however much wasn't rolled over on line 4b and you put the word "Rollover" next to it.

Anyway, if the money is eligible for rollover and you have rolled it over within 60 days, it's not taxable income, even if the rollover occurred in the next calendar year. Say you take a distribution on December 15 and file your taxes on January 30, paying tax on the entire distribution, but then you complete a 60-day rollover on February 12. You should amend your tax return and adjust the amount of the taxable withdrawal by however much you rolled over. That's perfectly legal and normal and the IRS will not have any problem with it. What you don't do is subtract it from the next year's taxable income.

However, the RMD amount is not eligible for rollover. The IRS knows what you're doing in your IRAs because they get 5498s from every IRA custodian every year. These forms show the account balances, contributions, rollovers, conversions, RMDs, etc. It's entirely possible for them to see whether or not you are meeting your RMD requirements.

 

[pb4uski]

Slow day at the marko household. This is just a theoretical/academic question.

As I understand it, you can withdraw from you IRA, pay no tax at withdrawal and if you return it to the IRA within 60 days there's no tax or penalty.

What would prevent you from withdrawing your RMD amount mid December, satisfying the IRS and then returning it to your IRA mid January? My take is that the IRS only looks for the RMD amount withdrawn, not the taxes paid. If that's not so, then the whole plan is moot. Just asking, not advocating anything.

marko, I'll visit you at whatever jail you end up in.

 

[marko]

marko, I'll visit you at whatever jail you end up in.

pb, you're the best!

 

[Midpack]

We avoid taxes on our RMDs by making distributions to charities using from our IRAs

We start QCDs later this year, great idea.

 

[Koolau]

Slow day at the marko household. This is just a theoretical/academic question.

As I understand it, you can withdraw from you IRA, pay no tax at withdrawal and if you return it to the IRA within 60 days there's no tax or penalty.

What would prevent you from withdrawing your RMD amount mid December, satisfying the IRS and then returning it to your IRA mid January? My take is that the IRS only looks for the RMD amount withdrawn, not the taxes paid. If that's not so, then the whole plan is moot. Just asking, not advocating anything.

Heh, heh, try it and let us know how it w*rks out!