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Old 01-14-2017, 03:58 PM   #41
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..........Realize that the only reason for having tax withheld is to avoid the underpayment penalty.

This publication says that "withholding" is treated the same as "on-time estimated payments"..........
Thanks. I was focused on the "on time" part. If you screw up and don't pay estimated taxes on withdrawals in an early quarter, using the IRA withholding in December is a get out of jail free card.
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Old 01-14-2017, 04:24 PM   #42
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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?
Been doing this every year in December with our IRA withdrawals since I retired in '12. It's why I buy TurboTax early - to plug in all known & expected income (Mutual fund distributions) & deductions so that I can determine the withdrawal size to keep income below tax & Medicare payment increases. Just tell Schwab what % of withdrawal goes to Feds & what % to state.
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Old 01-14-2017, 04:29 PM   #43
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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.
The RMD taxable amount can be reduced by making donations to charities directly from IRA - not withdraw & gift. It's limited to $100K/yr/person. That won't be an issue for us.

https://www.kitces.com/blog/qualifie...-requirements/
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Old 01-14-2017, 05:11 PM   #44
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RMD History

RMD requirements were waived in 2009 by executive order, to spare folks from having to pull funds out before the market recovered.

But the relief was really needed for 2008, as the market did recover a great deal in 2009.

Folks that waited until near the end of 2008 to pull our their RMD based on 12/31/07 would have had to sell a much larger % their portfolio then expected. If their portfolio had been cut in half by a third (not unlikely) they would have been forced to sell 2x to 1.5X the % of their final portfolio.

We are not anywhere near RMD age yet, but I expect we'll rebalance our IRAs early in the year so that enough of it is put in relatively stable investments to cover the RMD even if we wait until late in the year to withdraw it. I don't care about being able to eek out a small fraction more in return during the rest of the year most years.
Yes, I'm inclined to do it this way as well, particularly from high market valuations as we have now. A 50% drop in the market would mean that my 4% RMD at the beginning of the year effectively becomes 8% if I wait until the end of the year. That eats into a lot of small gains by staying invested for the potential extra return.
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Old 01-14-2017, 05:49 PM   #45
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But most years gain in value not lose.
For the S&P500, 27% of years are lower at year-end and 73% are higher. So, statistically, it's better to take the RMD out toward the end of the year.
But if this is a tIRA, if you take the money out sooner and invest it outside the IRA, you can avoid being taxed on that gain at high ordinary rates.
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Old 01-14-2017, 05:55 PM   #46
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Yes, I'm inclined to do it this way as well, particularly from high market valuations as we have now. A 50% drop in the market would mean that my 4% RMD at the beginning of the year effectively becomes 8% if I wait until the end of the year. That eats into a lot of small gains by staying invested for the potential extra return.
And you can't be guaranteed of an executive order to let you skip an RMD after a really bad market year (or that it be applied to the truly bad year).
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Old 01-14-2017, 06:43 PM   #47
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But if this is a tIRA, if you take the money out sooner and invest it outside the IRA, you can avoid being taxed on that gain at high ordinary rates.
With all the discussions in this thread, it seems like a lot of folks are planning to spend their RMD. As GrayHare has indicated, this does not have to be the case. You can just transfer the RMD to another taxable account and purchase the same investments there. What we are really talking about are the taxes that must be "spent". Why would this be treated any differently than any other expense? Many folks keep enough in cash for a year or more expenses to make sure they do not need to sell stocks in a down market. You can certainly have cash in your IRA for such purposes.
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Old 01-14-2017, 06:51 PM   #48
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But if this is a tIRA, if you take the money out sooner and invest it outside the IRA, you can avoid being taxed on that gain at high ordinary rates.
I hadn't thought about this angle but you are right (at least under current tax law). Another reason to take that distribution at the beginning of the year!
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Old 01-14-2017, 07:26 PM   #49
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But if this is a tIRA, if you take the money out sooner and invest it outside the IRA, you can avoid being taxed on that gain at high ordinary rates.
This is an interesting problem that I haven't fully resolved in my mind yet.
Similar to the early/late withdrawal but instead hi/lo. As an extreme example just for academic purposes, suppose the market goes down 96% so that you can withdraw your whole TIRA RMD and reinvest it in a taxable account. Or you take the RMD before the collapse so that most of your assets remain in the TIRA. Which is better?
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Old 01-15-2017, 07:37 AM   #50
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This is an interesting problem that I haven't fully resolved in my mind yet.
Similar to the early/late withdrawal but instead hi/lo. As an extreme example just for academic purposes, suppose the market goes down 96% so that you can withdraw your whole TIRA RMD and reinvest it in a taxable account. Or you take the RMD before the collapse so that most of your assets remain in the TIRA. Which is better?
There were many discussions similar to this 10-15 years ago, about doing a Roth conversion vs. leaving it in the IRA.

Without going thru the detailed math on this one, I'll fall back on what came out of those discussions: Since multiplication is commutative, it doesn't matter.
Either way, you have the same amount of money-in-hand at the finish. All you are doing is time-shifting when you pay the tax. For Roth conversions, that timeshift may be several years, so what matters is the difference (if any) in the marginal tax rates.

In the RMD case, since multiplication is still commutative, and since the time-shift in is the same tax year, I doubt that overall it makes any difference when you take it. The main thing that matters, then, is if the IRA account lost so much in a bear market between Jan and Dec that it didn't have enough money in Dec for the RMD.

Huh, it probably took me more time to type that that it would have taken to do the math.
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Old 01-15-2017, 07:51 AM   #51
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There were many discussions similar to this 10-15 years ago, about doing a Roth conversion vs. leaving it in the IRA.

................................................

.
rayvt........I believe you may have misinterpreted (or perhaps I didn't write clearly) my comments above. It was a followup on some previous discussion about withdrawing RMD and putting into taxable account, not about Roth conversions. btw , you can't Roth convert RMDs, only amounts in excess or RMDs.

oops........looks like I misread and skipped your relevant paragraph sandwiched in the middle......I too think that in a
non-extreme situation, it wouldn't make much difference but it is not clear to me w/o doing the math the end result in an extreme situation where you can remove the RMD and reduce the TIRA to 0 and thereby move the entire TIRA to taxable where taxation is less. I thought a 96% decline was extreme but I did not imagine consider the even more extreme case you suggest. My gut feel is that in the more extreme case, removal of RMD at the high would be better.
where the reduced TIRA cannot meet the RMD. My gut feel is that in the more extreme case,
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Old 01-15-2017, 08:10 AM   #52
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Still, theoretically, if you withdraw the RMD early and reinvest outside the IRA for the rest of the year (or withdraw in kind), you would be in the same position. The only thing is you give up the end of year withholding option which has a tax penalty avoidance benefit. And if you withdrew in kind, you'd be paying taxes out of non-RMD assets/income unless you sold the assets you withdrew which means you also lose long-term cap gains treatment if it's in the same year.

Personally I still probably wouldn't do that. Our IRAs are small compared to our total assets. We'd likely gift (including charitable), spend, and use proceeds to pay estimated taxes. Keeping more of the non RMD funds invested - which, hey, means it's still a wash!
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Old 01-15-2017, 08:16 AM   #53
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This is an interesting problem that I haven't fully resolved in my mind yet.
Similar to the early/late withdrawal but instead hi/lo. As an extreme example just for academic purposes, suppose the market goes down 96% so that you can withdraw your whole TIRA RMD and reinvest it in a taxable account. Or you take the RMD before the collapse so that most of your assets remain in the TIRA. Which is better?
In your scenario, you would end up with a higher basis for your index fund in the taxable account if you took the distribution before the market collapse, which would lower your CG tax should you sell in the future.
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Old 01-15-2017, 08:29 AM   #54
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In your scenario, you would end up with a higher basis for your index fund in the taxable account if you took the distribution before the market collapse, which would lower your CG tax should you sell in the future.
a good point but , I think, not the whole picture. In one case you have all of the assets in the taxable account with lower taxation rates (but a lower basis).
In the other case, most of the assets are still in the TIRA w/ a higher taxation tho the taxable account has a higher basis but only for a small fraction of the assets. Without doing the total analysis, it is not clear what the answer is.
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Old 01-15-2017, 08:43 AM   #55
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a good point but , I think, not the whole picture. In one case you have all of the assets in the taxable account with lower taxation rates (but a lower basis).
In the other case, most of the assets are still in the TIRA w/ a higher taxation tho the taxable account has a higher basis but only for a small fraction of the assets. Without doing the total analysis, it is not clear what the answer is.
You have to take the same $$ for your RMD regardless of when you take it, so you are going to pay ordinary income tax either way.
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Old 01-15-2017, 09:05 AM   #56
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You have to take the same $$ for your RMD regardless of when you take it, so you are going to pay ordinary income tax either way.
very true but in one case you paid it on 4% of the original amount and then removed all of the assets from the TIRA; in the other case you paid it on 4% of the original amount but most of the assets remain in the TIRA and you will continue to pay ordinary rates on all of it.

When (assuming) the market recovers, in the first case, you have all of the assets in a taxable account paying lower rates while the TIRA continues paying ordinary rates.
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Old 01-16-2017, 08:24 AM   #57
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Still, theoretically, if you withdraw the RMD early .. (withdraw in kind), you would be in the same position. The only thing is you give up the end of year withholding option which has a tax penalty avoidance benefit.
Excellent point.

I created a spreadsheet modelling the RMD timing a few years ago and it showed a slight benefit to taking the RMD late in the year. Obvious, since 75% of the time the market is higher at EOY, so you deplete the IRA less.

But .... I only looked at the IRA and neglected to look at the total picture. You are right, of course. If you withdraw stocks in kind, the stocks will grow the same whether they are inside the IRA or not, so it doesn't matter where they are, and it has no effect on your net worth -- what with multiplication being commutative and all.

You still have to pay the tax in cash, but you won't face the possibility that the IRA will be depleted by a market loss and won't have enough left to make the RMD.

By taking the RMD early, the only think you have to juggle is the withholding. And the worst-case there is that you might have to pay an under-withheld penalty.
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