RMD Distribution Strategy

[Gotadimple]

We have a few other threads that discuss some of the fine points of RMDs. Here is an interesting article from Christine Benz at Morningstar that focuses on the timing of the distribution and the effect of taxation.

In addition, the comments are also interesting relative to:
in-kind distribution as part of the strategy and
qualified charitable distribution (QCD) as part of a strategy
RMD and continuing partial Roth conversions as a strategy

I'm a few years away from needing to do a distribution, but I do know I will be firmly in the 25% bracket when it happens.

When's the Right Time to Take RMDs?

 

[street]

Thanks

 

[jazz4cash]

It says Roth IRAs have RMDs. I don't think that's right.

 

[bingybear]

It says Roth IRAs have RMDs. I don't think that's right.

not the way I read it. It says you have to make RMDs from Roth 401ks

 

[Koolau]

not the way I read it. It says you have to make RMDs from Roth 401ks

It says Roth IRAs have RMDs. I don't think that's right.

If it said either of these, I missed it.

Here was what I read: "...you'll need to take your RMDs before undertaking a <ROTH> conversion..." (my insert of ROTH)

I was not aware of this (and can't confirm it, though I suppose it makes some sense.) YMMV

 

[GrayHare]

Benz's articles are usually more precise than this one.

"It's also worth noting that you arrive at your RMD by calculating the amount for each of your accounts, but you can add together all of those RMDs for like accounts. You can then take that amount from a single account or holding." -- This would be a good place to describe what is meant by like accounts. One could easily incorrectly think she's distinguishing only between tIRA and t401k, whereas Roth is another unlike account type, as is inherited.

The article states it is intended "For affluent retirees" but neglects to mention a prime reason for taking RMDs early in the year. By doing so one avoids being taxed at ordinary income rates on the interest and dividends that would be earned by the RMD if it were instead taken later in the year.

 

[Independent]

The article states it is intended "For affluent retirees" but neglects to mention a prime reason for taking RMDs early in the year. By doing so one avoids being taxed at ordinary income rates on the interest and dividends that would be earned by the RMD if it were instead taken later in the year.

I would have guessed the opposite. Can you say more?

 

[jazz4cash]

not the way I read it. It says you have to make RMDs from Roth 401ks

Thanks for clarification. I read too quickly but as noted by Koolau and some comments, it was a bit confusing.

 

[GrayHare]

I would have guessed the opposite. Can you say more?

Since earnings in traditional retirement accounts will be taxed upon withdrawal at ordinary rates, if you take the RMD early in the year (and invest that money in a non-retirement account), at least that year's earnings on the RMD can be taxed at a lower rate, such as that for qualified dividends.

 

[jebmke]

Since earnings in traditional retirement accounts will be taxed upon withdrawal at ordinary rates, if you take the RMD early in the year (and invest that money in a non-retirement account), at least that year's earnings on the RMD can be taxed at a lower rate, such as that for qualified dividends.

The key here is that the tax may be lower the next year. The RMD taken THIS year is based on the Dec 31 value at the end of the prior year. The recommendation is made on the assumption that taking the RMD early in the year will result in a lower value at Dec 31 THIS year, thereby reducing next year's RMD. I think I got this right.

 

[RunningBum]

Seems like both would contribute, right? Once you're retired and assuming you're in a lower tax bracket, you don't really want deferred income anymore. Taking it out earlier so that it can grow during the year in a taxable account as qualified dividends or capital gains may let it be taxed at 0%. Furthermore, that growth isn't compounded in the deferred account, causing a higher RMD the next year. I think I'm just restating what you both just said in the last 2 posts.

 

[kaneohe]

Since earnings in traditional retirement accounts will be taxed upon withdrawal at ordinary rates, if you take the RMD early in the year (and invest that money in a non-retirement account), at least that year's earnings on the RMD can be taxed at a lower rate, such as that for qualified dividends.

This is an interesting concept. For those w/ crystal balls it could also be coupled with taking RMDs when the market is down. That way you remove a larger fraction of the retirement account to taxable (RMD fixed, retirement account down) .

Suppose you could control the market. Your IRA is 100 w/ RMD 4. You order market to drop 96% so IRA is worth 4. You take your RMD and now IRA=0 and taxable acct is 4. You order market to return to normal so person who did not take RMD yet has IRA = 100 vs your taxable=100. Your gains are capital gains and other person has ordinary income.

I suspect w/ normal ranges of market variation that , in the end, it probably does not make much difference how you take your RMDs but it is fun to think about.

 

[Gotadimple]

Seems like both would contribute, right? Once you're retired and assuming you're in a lower tax bracket, you don't really want deferred income anymore. Taking it out earlier so that it can grow during the year in a taxable account as qualified dividends or capital gains may let it be taxed at 0%. Furthermore, that growth isn't compounded in the deferred account, causing a higher RMD the next year. I think I'm just restating what you both just said in the last 2 posts.

Runningbum,
This is the what I understood was the intent of the early year distribution as described in the article. As you said, distribute early before additional dividend payments are applied to the account.

Also, if you don't need any of the RMDs to cover living expenses, you can use the early in the year strategy with an in-kind transfer strategy. Move x shares of ABC investment from the IRA to your brokerage account. Any future distributions are taxed at the lower dividend rate, and there should be no additional selling/buying costs. (But for most here, minimizing the commission structure is a rule, not a wish!)

I'd add a wrinkle to this: if I needed only a part of the RMDs, I might do 2 during the year, one for the in-kind, and a second to get to the full RMD for the year in cash.

- Rita

 

[Gotadimple]

This is an interesting concept. For those w/ crystal balls it could also be coupled with taking RMDs when the market is down. That way you remove a larger fraction of the retirement account to taxable (RMD fixed, retirement account down)

In the pages of comments on this article on Morningstar there was also a discussion of doing something similar, but in reverse, and with a caveat.

Pick your investment that has great growth potential, move it at it's high price (thereby reducing the IRA total value), reinvest at the high price because you know it will grow more.

Not quite sure this one would work out though. Withdrawing in a down market and reinvesting does work! Probably better than waiting for a high point as you have the power of the growing market to boost your investment in the long-run - and capital gains to shelter any future sale.

- Rita

 

[Independent]

Since earnings in traditional retirement accounts will be taxed upon withdrawal at ordinary rates, if you take the RMD early in the year (and invest that money in a non-retirement account), at least that year's earnings on the RMD can be taxed at a lower rate, such as that for qualified dividends.

Got it. Post #6 said "interest and dividends". I probably focused on the interest, but this reasoning seems to apply to dividends.

 

[pb4uski]

The whole beginning of year, end of year or over the year is just nibbling at the edges in my view.... for my Mom we set it up so Vanguard does the RMDs on her birthday.