DQOTD: RMDs before Roth Conversion Rules?

[Midpack]

I'm getting close to RMD age, and I just stumbled on this requirement - I must take and receive my annual RMD from my TIRA before I can do a Roth conversion? It's not a problem to do this I guess, but for the life of me I don't understand why it's necessary if RMD is based on my prior end of year TIRA balance anyway. I've done a couple searches and read a few articles plus some IRS docs but I don't understand why?

Anyone know just out of curiosity?

 

[audreyh1]

That is correct. The initial withdrawals count towards your RMD, anything above that can be a Roth conversion.

Perhaps to make tracking easier - for institutions reporting to IRS as well as individuals? People changing their minds later in the year but already put some funds in a Roth? That’s all I’ve ever been able to think of.

 

[RunningBum]

Maybe because if you die, your heirs might see money taken from the IRA and think it was the RMD, and fail to do it as required. Another tracking issue.

Or suppose you have $100K with a $5K RMD, and convert $95K first. If the value of the IRA drops, you may not have the $5K left in the account that was a required distribution. Though not impossible, this is a lot less likely to happen if you take the RMD first.

Maybe the IRS just wants their money more quickly. If you want to do that conversion early in the year, you have to take the RMD even earlier.

I don't see anything unfair about RMDs coming first. If you want to make 2 mortgage payments each month you can't tell the mortgage company that the first one goes against the principal, and you'll be sending a second one that covers the interest, right?

 

[Gumby]

Not directly on topic, but don't forget that if you want to do QCDs, you must do them first, before making any RMD.

 

[OldShooter]

Not directly on topic, but don't forget that if you want to do QCDs, you must do them first, before making any RMD.

Citation? Link?

Edit: This is what I have always thought: https://www.investopedia.com/articl...032116/how-use-qcd-rule-reduce-your-taxes.asp

 

[audreyh1]

Not directly on topic, but don't forget that if you want to do QCDs, you must do them first, before making any RMD.

Oh, right, that too!

Citation? Link?

Edit: This is what I have always thought: https://www.investopedia.com/articl...032116/how-use-qcd-rule-reduce-your-taxes.asp

QCDs first is what I always heard.

From https://www.lordabbett.com/en-us/fi...t=A QCD can only be done for the current year.

First-Dollars-Out-Rule

RMDs start for IRA owners (excluding a Roth IRA) in the year they reach age 72. For IRA owners with charitable intentions, a substantial tax benefit becomes available when a QCD is used. QCD can reduce or eliminate the income tax ordinarily due on RMD income. Notably, QCDs can start as early as 70 ½ (account owners 70 ½ birthday) even though minimum distributions aren’t required until age 72.

But ... timing is everything. To ensure you receive the QCD tax benefit you must coordinate your QCD with your RMD or your QCD may be treated as a taxable distribution. Why? The first dollars withdrawn from an IRA in any year (you are subject to an RMD) are deemed to be the RMD. This tax rule is referred to as the “first-dollars-out rule,” and that in turn creates a timing oddity for QCDs.

Maybe the issue is actually this:

Known as the “first-dollar-out rule”, the IRS requires that the first dollars withdrawn from an IRA in a year where an RMD is due will first go to satisfy the RMD. If the RMD is taken before the QCD, that RMD income can’t be offset by a QCD done later in the year.

From https://www.sdfoundation.org/profes...n as the “first-dollar,done later in the year.

QCDs can be done after an RMD is taken, but the QCD will be an additional distribution on top of the RMD.

(so no longer qualified to count against the RMD) from https://www.irahelp.com/slottreport/qcd-reminders-and-pitfalls

Important for those doing QCDs, RMDs and Roth Conversions on top.

 

[SecondCor521]

Not directly on topic, but don't forget that if you want to do QCDs, you must do them first, before making any RMD.

Doesn't sound right to me. QCDs count towards the RMD amount, so they are, in effect, RMDs themselves.

 

[Gumby]

Citation? Link?

Edit: This is what I have always thought: https://www.investopedia.com/articl...032116/how-use-qcd-rule-reduce-your-taxes.asp

https://www.lordabbett.com/en-us/fi...t=A QCD can only be done for the current year.


This explains it fairly well. I am up in the cabin in Maine and doing this all on my phone, so my research ability is somewhat limited right now. I have researched it in the past, including in the tax code, so I am confident this is correct.


Note that the QCD reduces the RMD amount, so your subsequent RMD distribution will be smaller. But you must do the QCD first.

 

[Gumby]

Doesn't sound right to me. QCDs count towards the RMD amount, so they are, in effect, RMDs themselves.

They do offset your calculated RMD amount, but they are not done the same way. The tIRA trustee must send the QCD directly to the charity. It cannot pass through your hands. A regular RMD, by contrast, is distributed directly to you.

There is a difference between noting that QCDs offset some of the RMD (they do) and noting that you must make the QCDs first for that to occur properly.

 

[OldShooter]

Hmm ... first I have heard of that. Imvestopedia has apparently not heard either.

I will be interested to see if someone comes up with an IRS citation.

 

[audreyh1]

Hmm ... first I have heard of that. Imvestopedia has apparently not heard either.
I will be interested to see if someone comes up with an IRS citation.

How about Ed Slott: https://www.irahelp.com/slottreport/qcd-reminders-and-pitfalls

I think the issue is this First-Dollars-Out rule. If you want the charitable donation to count against your RMD, thus reducing your taxable income, you must do them before you reach your RMD threshold. Assuming you mean to take out no more than your RMD.

QCDs can be done after an RMD is taken, but the QCD will be an additional distribution on top of the RMD.

So you don’t actually have to do them first, but you have to do them before you meet your RMD, otherwise they won’t count against your RMD.

Or as Kiplinger explains:

The first dollars out of an IRA are considered to be the RMD until that amount is met. If you want to do a QCD of $10,000 that will count toward a $20,000 RMD, be sure to make the QCD move before taking the full RMD out.

https://www.kiplinger.com/retirement/retirement-plans/required-minimum-distributions-rmds

Is there a question that there is such a First-Dollars-Out rule for RMD which many sources cite as being an IRS rule? It has some timing implications.

 

[OldShooter]

... Ed Slott: https://www.irahelp.com/slottreport/qcd-reminders-and-pitfalls ...

More confusing yet:

"We suggest doing QCDs early in the year to avoid any conflict with the 'first-dollars-out rule.' The first dollars withdrawn from an IRA are deemed to be the RMD (required minimum distribution). If an IRA owner is looking to offset the income from an RMD with a QCD, those transactions must be done in conjunction with each other. You cannot take an RMD payment and then decide to retroactively do a QCD with those same dollars. As mentioned in the facts above, a QCD “only applies to direct transfers of IRA funds to charities.” QCDs can be done after an RMD is taken, but the QCD will be an additional distribution on top of the RMD."
​

This just says I can't take a distribution and then try later to turn it into a QCD. Seems obvious. But it doesn't say I can't subsequently make a QCD directly from the IRA. So doesn't seem to support or contradict Gumby's citation.

Part of the confusion here, at least my confusion, is that there is no such thing as a "RMD distribution." All IRA distributions are the same: distributions. For those affected, the rule is that by the end of the year the total of distributions must be at least the calculated RMD amount. QCDs count towards the RMD amount, but I have never read anything other than Gumby's reference that says anything about the timing of distributions, QCD or not.

As a practical matter it would not be easy for taxpayers or the IRS to look at the intra-year timing of distributions. There is no timing information on the 1099s and the 1040 does not ask for timing information. It seems like, if timing is important, either the 1099s or the brokerage year-end statements would have that information.

 

[target2019]

There are a million links about Roth conversion strategy. Here's one:

Periodically converting a portion of your retirement savings into Roth assets can give you a flexible source of income and help lower the taxes you pay over time.
https://www.schwab.com/learn/story/build-tax-free-savings-using-roth-conversions

The user case presented in the above link explains the problem and solution.

Someone in this forum made a flow chart a while back.

 

[twobits]

QCDs count towards the RMD amount, but I have never read anything other than Gumby's reference that says anything about the timing of distributions, QCD or not.

My understanding is that by doing QCDs first, only the remaining amount needed to satisfy the RMD is taxable. If you do regular distributions that satisfy the RMD before you do any QCDs, you'll owe taxes on the full amount of the RMD, with the QCDs just being extra distributions that aren't taxed.

If you need the full RMD for your regular spending, it doesn't matter, but if you don't need the funds, it makes sense to use QCDs to lower the amount of taxes you'll owe.

As far as why the RMD must be satisfied before any Roth Conversions (Or IRA rollovers), I've read that it is solely to make sure the RMD is clearly satisfied and to avoid any confusion with records.

 

[OldShooter]

My understanding is that by doing QCDs first, only the remaining amount needed to satisfy the RMD is taxable. If you do regular distributions that satisfy the RMD before you do any QCDs, you'll owe taxes on the full amount of the RMD, with the QCDs just being extra distributions that aren't taxed. ...

Yes. I am a QCD fan. Schwab actually sends us blank QCD checks that we can write and send to eligible charities. We use them even for small stuff like public radio membership.

In our case, our deductible expenses except for charity amount to only about 50% of the standard deduction. So by handling the charitables via QCDs we can take the standard deduction and the other half of the deduction is a freebie.

 

[TheWizard]

I take my RMD as equal monthly amounts.
Let's say my computed RMD from my IRA is $60,000.
Then I can setup a monthly withdrawals of $3000 and still do a $24,000 QCD at any time during the calendar year, even in late December.

Let's not make this complicated...

 

[TheWizard]

The "rule" about completing your RMD for the year before doing a Roth conversion for the same year is a commonly accepted Urban Legend.

I say that because I found nothing about this in the IRS publications I searched a year or two ago, including the obvious Pub 590-B.

So, yeah, I'd like to see something from the IRS or Treasury department websites that addresses this issue.
It won't matter much to me since I wait till late December to Roth convert, based on what my AGI for the year is, approximately...

 

[RunningBum]

I'm not sure what this document is, but it is on the IRS site. It sounds like a Q&A session with financial planner type people.

https://www.irs.gov/pub/irs-tege/forum10_roth_conversions.pdf

On page 8:

For taxpayers required to take required minimum distributions -- they should take the distribution before doing the conversion. Required minimum distributions can't be rolled over and the first dollars withdrawn in a year are deemed to be the RMDs for that year.

 

[Gumby]

I take my RMD as equal monthly amounts.
Let's say my computed RMD from my IRA is $60,000.
Then I can setup a monthly withdrawals of $3000 and still do a $24,000 QCD at any time during the calendar year, even in late December.

Let's not make this complicated...

I can foresee a situation where the order would be quite important. Suppose your calculated RMD is $60k, and you take that in January. You don't need the money to live on; you're just doing it to satisfy the IRS. So you pay the marginal tax rate on 60k. In June, your church's steeple is hit by lightning and burns. Emergency repairs are needed. Being a good guy, you make a $15k QCD to the church to effect the repairs. In this situation, due to the first dollar rule, you will not get the tax benefit off having the QCD offset part of your RMD. If you are in the 22% bracket, you will pay $3300 in unnecessary taxes.

 

[SecondCor521]

My understanding is that by doing QCDs first, only the remaining amount needed to satisfy the RMD is taxable. If you do regular distributions that satisfy the RMD before you do any QCDs, you'll owe taxes on the full amount of the RMD, with the QCDs just being extra distributions that aren't taxed.

If you need the full RMD for your regular spending, it doesn't matter, but if you don't need the funds, it makes sense to use QCDs to lower the amount of taxes you'll owe.

As far as why the RMD must be satisfied before any Roth Conversions (Or IRA rollovers), I've read that it is solely to make sure the RMD is clearly satisfied and to avoid any confusion with records.

I can foresee a situation where the order would be quite important. Suppose your calculated RMD is $60k, and you take that in January. You don't need the money to live on; you're just doing it to satisfy the IRS. So you pay the marginal tax rate on 60k. In June, your church's steeple is hit by lightning and burns. Emergency repairs are needed. Being a good guy, you make a $15k QCD to the church to effect the repairs. In this situation, due to the first dollar rule, you will not get the tax benefit off having the QCD offset part of your RMD. If you are in the 22% bracket, you will pay $3300 in unnecessary taxes.

Regarding the above, the ordering of distributions doesn't matter for taxation.

If you take out $60K in ordinary distributions and $15K in QCDs, your tax bill will be exactly the same regardless of the ordering (or size, or number) of the distributions. At the end of the year, you'll get a 1099-R with $75K in box 1, and you'll subtract the $15K and notate QCD on your tax return.

Now if Gumby is implying but not saying that the church steeple guy would have only withdrawn $45K in January had he known the future, then that is a different kettle of fish. You'd be right in saying he wouldn't be able to stuff $15K of that January withdrawal back into his IRA once withdrawn. So that is a legitimate timing consideration, but it isn't an ordering consideration.

The "rule" about completing your RMD for the year before doing a Roth conversion for the same year is a commonly accepted Urban Legend.

I say that because I found nothing about this in the IRS publications I searched a year or two ago, including the obvious Pub 590-B.

So, yeah, I'd like to see something from the IRS or Treasury department websites that addresses this issue.

I too like to have definitive and authoritative guidance rather than what SGOTI or a blog page posts.

Occasionally the BH people point out to me that the IRS publications aren't actually tax law, and you can't officially rely on them for 100% proper tax preparation. Even though 99.99% of us do. The actual tax law is Title 26 US Code, and then there are also IRS / Treasury regulations (in the CFR - Code of Federal Regulations) that effectively have the force of law.

My point is that even if it's not in 590-B, does not mean that it is an urban legend.

I personally don't think it's true, but I do think that pub 590-B could be improved by clarifying the ordering question.

Anyway, although we're talking about ordering of RMDs and QCDs, here is a link to a BH post where they talk about the ordering of RMDs and Roth conversions, which is a similar but distinct topic:

https://www.bogleheads.org/forum/viewtopic.php?p=7222461#p7222461

It's possible that the link there points to some stuff which might shed light on the ordering of RMDs and QCDs. I haven't looked.

 

[audreyh1]

I can foresee a situation where the order would be quite important. Suppose your calculated RMD is $60k, and you take that in January. You don't need the money to live on; you're just doing it to satisfy the IRS. So you pay the marginal tax rate on 60k. In June, your church's steeple is hit by lightning and burns. Emergency repairs are needed. Being a good guy, you make a $15k QCD to the church to effect the repairs. In this situation, due to the first dollar rule, you will not get the tax benefit off having the QCD offset part of your RMD. If you are in the 22% bracket, you will pay $3300 in unnecessary taxes.

That’s basically what it comes down to. But it’s pretty hard to plan for unexpected charitable needs/emergencies l

 

[Gumby]

Regarding the above, the ordering of distributions doesn't matter for taxation.

If you take out $60K in ordinary distributions and $15K in QCDs, your tax bill will be exactly the same regardless of the ordering (or size, or number) of the distributions. At the end of the year, you'll get a 1099-R with $75K in box 1, and you'll subtract the $15K and notate QCD on your tax return.

Now if Gumby is implying but not saying that the church steeple guy would have only withdrawn $45K in January had he known the future, then that is a different kettle of fish. You'd be right in saying he wouldn't be able to stuff $15K of that January withdrawal back into his IRA once withdrawn. So that is a legitimate timing consideration, ....

That's exactly what I intended to say. I apologize that I was not clearer. What this shows me is that I should wait until late in the year to do my RMD, so that if I have done any QCDs during the year, I could take advantage of them and make my RMD distribution smaller. If I knew ahead of time exactly what my QCD would be for the year, I suppose I could do it in any order so long as my QCD + my distribution to myself did not exceed the calculated RMD for the year.

 

[OldShooter]

I can foresee a situation where the order would be quite important. Suppose your calculated RMD is $60k, and you take that in January. You don't need the money to live on; you're just doing it to satisfy the IRS. So you pay the marginal tax rate on 60k. In June, your church's steeple is hit by lightning and burns. Emergency repairs are needed. Being a good guy, you make a $15k QCD to the church to effect the repairs. In this situation, due to the first dollar rule, you will not get the tax benefit off having the QCD offset part of your RMD. If you are in the 22% bracket, you will pay $3300 in unnecessary taxes.

That is an argument to make no QCDs until the end of the year, then make only enough donations to bring total distributions to the RMD amount. But it has nothing to do with IRS regs.

That's not the way DW and I handle charitable giving. We make QCDs throughout the year based on the charitable giving that we want to do. The idea of letting the RMD amount drive our charitable giving just wouldn't fit.

You can turn this example on its head if you like. During the year make QCDs to whatever extent you choose, then bring your total distributions to your RMD in December by just taking an appropriately-sized cash distribution. Same goal, same result.

 

[Gumby]

You can turn this example on its head if you like. During the year make QCDs to whatever extent you choose, then bring your total distributions to your RMD in December by just taking an appropriately-sized cash distribution. Same goal, same result.

Exactly. As I said in the first post, make QCDs first so you can get the full tax benefit of having done so. Otherwise, you risk losing some of that to the first dollar rule if the total goes over the calculated RMD for the year.

 

[SecondCor521]

That's exactly what I intended to say. I apologize that I was not clearer. What this shows me is that I should wait until late in the year to do my RMD, so that if I have done any QCDs during the year, I could take advantage of them and make my RMD distribution smaller.

No worries; I was just trying to be courteous and not assume.

If I knew ahead of time exactly what my QCD would be for the year, I suppose I could do it in any order so long as my QCD + my distribution to myself did not exceed the calculated RMD for the year.

Emphasis added.

I would like to clarify that a person can do QCDs such that the total of QCDs and normal distributions exceed their RMD amount and have the QCDs still be tax free (as long as they comport with all the other QCD requirements).

For example, let's say your RMD amount is $60K. You can do a regular distribution of $50K and QCDs of $50K and that's totally fine. You'll pay ordinary income taxes on the $50K and the QCDs will still be tax free.

You may or may not *want* to do this (I can imagine scenarios for each case), but it's perfectly OK to do so.