RMD nuts and bolts

[Lsbcal]

Isn't it the case that any taxes paid from any IRA withdrawal (whether an RMD) or not are treated as if they were evenly withheld throughout the year? I seem to recall having read that, but don't know if that has changed.

I believe there is a special IRS form for showing when income was received during the year. You can pull it up on Turbo Tax, form 2210 I think. So if one is delaying income (IRA withdrawals) until later in the year, that could be used.

FWIW, I usually take Roth withdrawals early in the year and then IRA withdrawals later in the year. When I use Turbo Tax I make sure there is no computed penalty for late payment of taxes.

 

[Katsmeow]

I believe there is a special IRS form for showing when income was received during the year. You can pull it up on Turbo Tax, form 2210 I think. So if one is delaying income (IRA withdrawals) until later in the year, that could be used.

No, that isn't what I am talking about. I do know that at one time any time you withheld taxes from an IRA -- no matter when during the year -- it was considered as if the taxes had been evenly withheld during the year. Therefore, it obviated the need to pay estimated taxes. What I don't know is if that is still the case or if it has changed.

 

[ERD50]

I had the opportunity to compare the early in the year vs late in the year question during my career. We had charitable trusts that made on payment per year, in Dec., based on the prior year FMV. Our president was also the primary investment guy, and he hated the thought of losing the year of investment returns if we raised cash in Jan. After several years, we showed him the analysis that the "lost" returns in an up year compared to the savings if the market went down (selling more shares that are at a lower price for the same $$). The lost return on an annual 6% withdrawal was about 5% of the annual return, but the additional loss in a down year was about 2X the overall loss. Take the money in Jan, and sleep well all year.

Wouldn't this infer that on average, stocks are lower at the EOY than at the start of year? If that were true, doesn't that mean the stock market, on average, is going lower?

What years did your study include?

Am I missing something?

-ERD50

 

[Koolau]

But, assuming one is invested in stock/bond funds that drop a lot in value during the year (such as 1987, 1990, 2002, 2008 etc), wouldn't this result in selling more shares to cover the RMD liability than if one had sold on Jan 1?

I could be wrong, so do your own research (AND strongly correct me here): I was thinking when multiple tIRAs were in play, one could pay all or part of the RMD from less than equal amounts from each tIRA. IOW, pay from your winners and keep your (temporary) losers to regain their (hopefully temporary) losses - just be sure to cover the whole RMD nut. Anyone know if this correct or NOT? Maybe it's from several 401(k)s or NONE OF THE ABOVE which is why I say:

Always recall my advice is free and worth every penny of it since YMMV.

 

[MissMolly]

I could be wrong, so do your own research (AND strongly correct me here): I was thinking when multiple tIRAs were in play, one could pay all or part of the RMD from less than equal amounts from each tIRA. IOW, pay from your winners and keep your (temporary) losers to regain their (hopefully temporary) losses - just be sure to cover the whole RMD nut. Anyone know if this correct or NOT? Maybe it's from several 401(k)s or NONE OF THE ABOVE which is why I say:

Always recall my advice is free and worth every penny of it since YMMV.

For IRAs including Simple and SEP and from 403b accounts you can aggregate the total RMD and pull from a single account. For all 401K accounts you must pull from each account individually. Inherited accounts have special rules, so the above only applies to non-inherited accounts.

 

[Koolau]

For IRAs including Simple and SEP and from 403b accounts you can aggregate the total RMD and pull from a single account. For all 401K accounts you must pull from each account individually. Inherited accounts have special rules, so the above only applies to non-inherited accounts.

Thanks! Kinda what I thought, but was not sure. Doesn't apply to me, but I saw the tIRA thing as a mixed blessing in that those with multiple tIRAs have some flexibility in what tIRA to draw the RMD from. Could ameliorate the "down" at the end of the year issue if there are also so "ups" to pull from (if appropriate to your AA). As always, YMMV.

 

[Taxman59]

What years did your study include?

Am I missing something?

-ERD50

We looked at the period 1990 - 1997. Not an overly long period, but the key was when do you sell to have the cash available about Dec 15th? The market was generally higher year over year, but it isn't a straight line. One year of your portfolio being down ON THE DATE YOU SELL, causing a much larger sell, can wipe out the growth for the year (remember, the trusts had to distribute 6% each year, and we still wanted the principal to grow). Think of it as leverage, lose a 10% gain on 6% of the portfolio (.6% return) vs. lose 10% on the portfolio and have to sell 6.67%. Over the time period, we showed that the overall loss was about 4% of the portfolio. Not earth shattering, but significant enough to notice. BTW, the president blamed the results on the specific investments underperforming, and ignored the math!

 

[travelover]

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?

Bumping this because I'm still curious.

 

[braumeister]

Why would you expect it to be different? Withholding is withholding.

 

[travelover]

Why would you expect it to be different? Withholding is withholding.

Thanks, I did not know that "withholding is withholding". This could be an effective trick to save a penalty if one took a distribution early in the year and forgot to withhold for it in the same quarter.

Edit : Found this article that suggests that one could even withhold the entire IRA distribution for taxes and then replace it within 60 days if you wanted the money to stay in the IRA. http://www.forbes.com/sites/advisor/2011/06/24/withholding-tax-without-income/#30303bf91016

 

[rayvt]

One more little wrinkle I usually bring up because it's not widely known:

To avoid making estimated tax payments quarterly, you can have your entire expected tax bill withheld from your RMD. The IRS treats anything withheld as if it had been paid evenly throughout the year. For those who don't need the money to live on, it could be advantageous to take that RMD and withholding in December, so the money keeps earning for you throughout the year.

YAY!! I'm not the only one who figured this out! I have not heard it stated explicitly before.

You can do this for the tax on Roth conversions, too. We have been converting almost to the top of the 15% bracket early in the year, and then in late December convert the remaining amount and have the broker withhold 99% tax.

 

[rayvt]

But, assuming one is invested in stock/bond funds that drop a lot in value during the year (such as 1987, 1990, 2002, 2008 etc), wouldn't this result in selling more shares to cover the RMD liability than if one had sold on Jan 1?

Yes.

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.

 

[kaneohe]

.......................r.

Edit : Found this article that suggests that one could even withhold the entire IRA distribution for taxes and then replace it within 60 days if you wanted the money to stay in the IRA. Forbes Welcome

but be careful doing this since it is considered a rollover and you can only do this once every 12 mos. (not calendar yr). If you violate this timing, the IRA distribution becomes taxable and the rollover is not valid.

 

[audreyh1]

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 than 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.

 

[rayvt]

"could one just take an IRA withdrawal and have the year's taxes withheld from it to the same effect?"
Bumping this because I'm still curious.

It's in another IRS publication, separate from the IRA publication. You just have to know where to find it.

https://www.irs.gov/pub/irs-pdf/p505.pdf

Pub 505, Chapter 4: Underpayment Penalty for 2015

Introduction
[FONT=Helvetica World,Helvetica World][FONT=Helvetica World,Helvetica World]If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have underpaid your estimated tax and may have to pay a penalty. [/FONT][/FONT]


No penalty.
General Rule





In general, you may owe a penalty for 2015 if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:

1. 90% of your 2015 tax, or
2. 100% of your 2014 tax.

Pub 505, Chapter 1: Tax Withholding for 2016
Section: Pensions and Annuities

You can choose not to have tax withheld, regardless of how much tax you owed last year or expect to owe this year.
If you do not pay enough tax, either through estimated tax or withholding, or a combination of both, you may have to pay a penalty. See chapter 4.

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".
Therefore, it doesn't matter when in the year you have it withheld.
So basically, you want to make the late December withholding to be enough so that your total withheld in the year is whatever your tax was the previous year.

Or 90% of the current year's tax, but you don't know precisely what that will be. But you *do* know how much you paid the previous year.

 

[travelover]

..........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.

 

[gerntz]

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.

 

[gerntz]

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/qualifi...om-ira-to-satisfy-rmd-rules-and-requirements/

 

[ejman]

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.

 

[GrayHare]

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.

 

[audreyh1]

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).

 

[Hermit]

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.

 

[ejman]

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!

 

[kaneohe]

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?

 

[rayvt]

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.