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Should I take RMD before or after capital gains distribution?
Old 11-24-2020, 01:59 PM   #1
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Should I take RMD before or after capital gains distribution?

I've been planning to take my RMD next month from a tax-deferred IRA account (VTSAX) and transfer the amount (less withholding) to the same fund in an after-tax account. Is it better to do this before or after the fund pays capital gains distributions? I've been trying to figure out the pros & cons -- or is it basically a wash?

I know RMDs aren't required this year but about 50% of my assets are tax-deferred & I want to reduce that a bit. (Or is that silly? I won't be needing the funds anytime soon.)
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Old 11-24-2020, 02:26 PM   #2
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To answer your question, it'd be better to do it after distributions. Otherwise you'll get hit with this year's dividend in your taxable account, which you'd probably not want to do.

But, since you don't need the funds anytime soon, why not convert it to a Roth rather than withdraw? Then all dividends and cap gains are tax free. If you convert to a Roth, then the timing doesn't matter since it's not a taxable event in either your tIRA or Roth. Seems like a no-brainer to me.
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Old 11-24-2020, 03:46 PM   #3
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Originally Posted by lucky penny View Post
I've been planning to take my RMD next month from a tax-deferred IRA account (VTSAX) and transfer the amount (less withholding) to the same fund in an after-tax account. Is it better to do this before or after the fund pays capital gains distributions? I've been trying to figure out the pros & cons -- or is it basically a wash?

I know RMDs aren't required this year but about 50% of my assets are tax-deferred & I want to reduce that a bit. (Or is that silly? I won't be needing the funds anytime soon.)
It doesn't make one bit of difference. I'm in the same situation as you with about 50% in tax deferred and I wouldn't think of touching mine this year. I'm even postponing QCD's until January to reduce my RMD for next year. Why pay taxes when you don't need to?
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Old 11-24-2020, 03:54 PM   #4
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To answer your question, it'd be better to do it after distributions. Otherwise you'll get hit with this year's dividend in your taxable account, which you'd probably not want to do.

But, since you don't need the funds anytime soon, why not convert it to a Roth rather than withdraw? Then all dividends and cap gains are tax free. If you convert to a Roth, then the timing doesn't matter since it's not a taxable event in either your tIRA or Roth. Seems like a no-brainer to me.
^^^ This
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Old 11-24-2020, 04:50 PM   #5
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Originally Posted by RunningBum View Post
But, since you don't need the funds anytime soon, why not convert it to a Roth rather than withdraw? Then all dividends and cap gains are tax free. If you convert to a Roth, then the timing doesn't matter since it's not a taxable event in either your tIRA or Roth. Seems like a no-brainer to me.
I probably need to do more research on Roths, but I understood that a tax-deferred IRA can only be "converted" to a Roth after paying taxes on the IRA contributions & gains.
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Old 11-24-2020, 05:00 PM   #6
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I probably need to do more research on Roths, but I understood that a tax-deferred IRA can only be "converted" to a Roth after paying taxes on the IRA contributions & gains.
not sure about the "after" part...........you could convert and then pay the taxes later for that yr. The tax consequences of withdrawing from TIRA are the same as doing a Roth conversion but you end up w/ a better after-tax situation w/ the Roth.
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Old 11-24-2020, 05:16 PM   #7
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I probably need to do more research on Roths, but I understood that a tax-deferred IRA can only be "converted" to a Roth after paying taxes on the IRA contributions & gains.
It works the same as an RMD... the RMD or Roth conversion is income whenit leaves the tax-deferred account... then the money either goes into a taxable account in the case of an RMD or into a tax-free Roth IRA.

Just keep in mind for 2021 and beyond that RMDs must be done before Roth conversions... IOW a Roth conversion doesn't count towards your RMD requirement. Of course in 2020 since the RMD was change to zero the impact was moot.
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Old 11-24-2020, 10:29 PM   #8
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I probably need to do more research on Roths, but I understood that a tax-deferred IRA can only be "converted" to a Roth after paying taxes on the IRA contributions & gains.
What others have said and what you're thinking is correct: you'll owe ordinary income taxes on a Roth conversion in the year of the conversion.

I think what RunningBum was referring to and maybe thinking about when writing "it" in what you quoted was talking about the December VTSAX dividend distribution. That dividend distribution is obviously a non-taxable event whether it happens inside the traditional IRA or inside the Roth IRA.
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