Withdrawals from IRA

[mrfeh]

Taxes on IRA distributions CAN be avoided--if you are at least age 70.5 you can have IRA distributions go to a charity (up to a max of $100,000 per year) under the Qualified Charitable Distribution rules. The IRA owner and the charity pay no tax on the distribution. Plus the charitable distribution amount reduces the RMD you would otherwise have to take. This is what my DH and I are doing, we may never have to take a RMD from our substantial IRAs.

Sure, but this benefits the charity, not the account holder.

 

[Gumby]

I donate to charity every year. If I first withdraw from my tIRA, pay the tax and then donate, it costs me more than doing a QCD directly from the tIRA to the charity. So the QCD benefits me. The charity gets the same amount.

 

[OldShooter]

If a person is over 70.5 there is a way to do tax free distributions from the person's traditional IRA using a Qualified Charitable Distribution. The check from the IRA must be made out to a charity. Such a distribution is not taxable to the IRA owner or the charity. Works great for a person over age 70.5 who wants to make gifts to a charity.

The general idea on Roth conversions is that they are A Good Thing because the income taxes are effectively prepaid. But to the extent that tIRA funds are used for QCDs or distributed to charities as part of an estate plan, using tIRA funds is a much better deal because the income taxes are never paid. So holding money planned for charitable donations in tIRAs is a wise strategy.

 

[harllee]

Sure, but this benefits the charity, not the account holder.

But it benefits me as the IRA holder too--I am contributing to charitable causes I am passionate about and that makes me very happy. I am going to contribute to the charities anyway--doing from my IRA works so much better. Of course if you do not want to contribute to charities your situation is different from mine. But even if you only contribute a few hundred dollars to charities each year it is much better to do it from your IRA after age 70.5.

 

[OldShooter]

Sure, but this benefits the charity, not the account holder.

By not including the QCD amounts in our deductions we are able to take the standard deduction. Since our itemized deductions sans charity are half or less of the standard amount we effectively a "free" deduction for the difference.

 

[Animorph]

I take tIRA withdrawals each year in a way that maximizes my yearly spending over the rest of my (estimated) life. Mostly it's making withdrawals at the lowest tax rates available, This is where future tax rates, income limits for tax breaks, QCD's, and all the rest of the stuff needs to be considered.

If the tIRA withdrawal is more than my expenses, that excess is withdrawn as a Roth conversion. That preserves the retirement account benefits for that money, while delaying the final withdrawal date.

The Roth conversions give me access to the 0% and other low tax brackets for withdrawing my tIRA money while we have no pension, Social Security, or tIRA RMD's filling up those brackets. That's a pretty clear benefit for me.

If you have no taxable investment accounts and your tIRA withdrawals would come out at the same tax rate if taken now or as RMD's down the road (or you are already taking RMD's), then a Roth conversion may be of no benefit to you. That will be pretty close to our situation in just a few years, when our Roth converting will stop.

It's a tax reduction strategy. You have to estimate your taxes for future years, optimize your tIRA withdrawals for each year, and make all sorts of assumptions to get the best results. Nobody likes to do that, except a few of us, and an FA probably won't want to spend the time to create and defend a conversion plan. One that changes every year as your tIRA portfolio expands or shrinks. You can get quite a bit with fairly simplistic estimates and assumptions, but it is always easier to just ignore it all.

In our case it was worth about 7% additional yearly spending versus doing nothing. I think doing just the fairly obvious stuff would have given us about 6% additional spending. All the super optimization made a great hobby, which I enjoyed, and added a bit of confirmation to the strategy, but I think the benefit to time ratio was very low.

 

[Ncc1701]

It is effectively a sell and buy. The point I was trying to make is that taxes cannot be avoided.

Incorrect, it is NOT effectively a sell and a buy. You can easily MOVE shares without trading anything between your IRA and taxable brokerage account.

 

[Gumby]

Incorrect, it is NOT effectively a sell and a buy. You can easily MOVE shares without trading anything between your IRA and taxable brokerage account.

For taxes, it is equivalent to selling in the tIRA, transferring cash and rebuying in your taxable account at the same price, since you have to pay taxes as ordinary income on the full value of the transfer in kind. (Note that this assumes you had no after tax contributions to your tIRA.)

Your new basis in the taxable account is the price at the time of the transfer.

 

[pb4uski]

As others have pointed out, you can't transfer securities from a traditional IRA to a brokerage account. You have to sell them, and pay income taxes on the gains.

What you do with the proceeds at that point is up to you.

It is effectively a sell and buy. The point I was trying to make is that taxes cannot be avoided.

Yeah, but you wrote it wrong. "You have to sell them and pay income taxes on the gains"... no, there are no taxes on capital gains within an IRA. The proceeds are then in the tIRA. It isn't until you withdraw money from a tIRA that you have a taxable event. It doesn't matter if the withdrawal is the proceeds from the sale of securities or cash that has been sitting in the account for years.

I have transferred securities from a tIRA to a Roth IRA. No need to sell, transfer and then buy...just a transfer of shares from the tIRA to the Roth and the fair value of the shares transferred is the conversion amount. I suspect the same can be done to a brokerage account but I've never tried to do it.

The one thing you have right is that the taxes can't be avoided.

 

[gman1234]

Is there a particular reason for that or is s/he just a moron? Tax-free growth isn't good enouth?

Mathematically it's the same outcome for a Roth and a Traditional IRA. The only difference is your tax rate going in and going out. For ME, my tax rate was much higher going in (at my peak, I was at max incremental rate) and much lower in retirement. The only other consideration is if you have some other reason to keep your AGI low (like qualification for ACA).

 

[OldShooter]

Mathematically it's the same outcome for a Roth and a Traditional IRA. The only difference is your tax rate going in and going out. For ME, my tax rate was much higher going in (at my peak, I was at max incremental rate) and much lower in retirement. The only other consideration is if you have some other reason to keep your AGI low (like qualification for ACA).

Yes. It took me an embarrassingly long time to figure out that a Roth conversion is simply a tax rate arbitrage game with the future tax rate somewhat unknown.

The arbitrage decision is complicated by the fact that the current net tax rate includes federal income, state income, IRMAA, ACA considerations, and maybe even other factors. Looking only at the income tax numbers could mislead someone.

Another factor in the conversion decision is the planned disposition of tIRA money in an estate. For tIRA money going to charity, a Roth conversion is insane. For tIRA money going to offspring and grands it is probably likely that their tax rates will be lower than the dear departed's. If so, the conversion is unwise.

 

[davidfin]

If however you were to journal the shares to a Roth account, you’d pay the taxes as ordinary income on the initial transfer but any appreciation in the Roth would be tax free. Journaling the shares saves the hassle of selling and buying again.

 

[FLJim]

If however you were to journal the shares to a Roth account, you’d pay the taxes as ordinary income on the initial transfer but any appreciation in the Roth would be tax free. Journaling the shares saves the hassle of selling and buying again.

Schwab allows journalling. But "hassle" of buying/selling? Schwab charges me no commissions, and the exchange fee on sales is infintessimal.

 

[TheWizard]

Schwab allows journalling. But "hassle" of buying/selling? Schwab charges me no commissions, and the exchange fee on sales is infintessimal.

I have no idea what "journalling" means...

 

[davidfin]

Journaling shares is basically a bookkeeping device to transfer shares from an owners account to another account owned by the same person or entity.

 

[dheb]

So I am planning to take some funds out of the IRA. I understand that I can transfer Stock, Bonds, ETF, Mutual funds from the IRA to my non IRA account. My question is - will that event set up me up in having to pay double taxes on those funds if they should increase in value from the time I move them to sell them?

(For example I would move $100,000 to the non IRA account. It has a basis in the IRA for a stock cost at $50,000. So it has grown by $50,000. I believe I would pay the appropriate taxes on the $100,000 in that year. If the amount were to grow an additional $25,000 to $125,000. Suppose I sell the stock for $125,000 the following year. Would I not get hit for a new tax event in the amount of $75,000 being ($125,000-$50,000)). It seams to me that I would pay double taxes on the 1st $100,000.

Or should I sell the stock in the IRA to cash for $100,000 and move it to the non IRA account as cash? Thanks for your comments.

When you move $100k to the non-IRA account, you're taxed on that as though it's just regular income. If you move it into something like equities in a regular brokerage, and they increase in value, then, yes, you would be taxed on the increase. Let's say you moved $100k out of the IRA into the XYZ Fund in a non-IRA account. The XYZ Fund has a great week, and the value of your shares goes to $120k. You sell the shares. You owe the basic tax on the money moved out of your IRA; and you owe short-term capital gains tax on the $20k you made after the move. If XYZ Fund loses $20k after the move, you would owe tax on the $100k transfer out of your IRA, and you could claim a loss on the $20k if you sell the shares at a loss. You're not being double-taxed. You're being taxed separately on two different taxable events.

 

[dheb]

But you will pay income tax on the withdrawal from the traditional IRA.

There is no way to avoid this.

This is the way: if you are a single filer, take $12,500 or so from your traditional IRA annually. Take the rest of your income from a Roth, and/or from selling stock in a non-IRA brokerage (being sure to keep the amount of capital gains under the max to stay in the 0% cap gains tax zone). Take your standard deduction. You just withdrew $12,500 from a traditional IRA without owing tax on the withdrawal. (Married filers use different amounts, but can employ the same strategy.)

Do that for 10 years, and a single filer can pull about $125,000k out of their traditional IRA without paying income tax on it.

 

[SecondCor521]

This is the way: if you are a single filer, take $12,500 or so from your traditional IRA annually. Take the rest of your income from a Roth, and/or from selling stock in a non-IRA brokerage (being sure to keep the amount of capital gains under the max to stay in the 0% cap gains tax zone). Take your standard deduction. You just withdrew $12,500 from a traditional IRA without owing tax on the withdrawal. (Married filers use different amounts, but can employ the same strategy.)

Do that for 10 years, and a single filer can pull about $125,000k out of their traditional IRA without paying income tax on it.

State income taxes could be a consideration.

Another way to avoid the tax is to donate the funds, either via a QCD or a beneficiary designation. Although with this method, you don't get to spend the remainder.

 

[Winemaker]

As others have pointed out, you can't transfer securities from a traditional IRA to a brokerage account. You have to sell them, and pay income taxes on the gains.

What you do with the proceeds at that point is up to you.

I have done this over 16 years with my late mom's RMDs. She never needed the money so when she passed away in December we all received a step up in basis, on the day of her death. Prior to that her basis was determined on the day of transfer from her tIRA.


Mom paid the income taxes on the distribution from her money market account.

 

[pb4uski]

Mathematically it's the same outcome for a Roth and a Traditional IRA. The only difference is your tax rate going in and going out. For ME, my tax rate was much higher going in (at my peak, I was at max incremental rate) and much lower in retirement. The only other consideration is if you have some other reason to keep your AGI low (like qualification for ACA).

If your tax rate is the same now as it will be at RMD time then it is mathematically the same outcome... but for many posters here, their tax rate earlier in retirement is much lower than it is later once pensions, SS and RMDs start, and in those very common cases it is not mathematically equivalent.

 

[pb4uski]

I have no idea what "journalling" means...

an in-kind transfer of shares. So if you have 100 shares of XYZ Company, the brokerage transfers the actual shares from the tIRA to the Roth or from a tIRA to a brokerage account... but the tIRA is withdrawal is measured at the value of the shares on the date that they are transferred... so substantively it is as if one sold the 100 shares for $x per share in the tIRA, transferred the proceeds from said sale to the brokerage account and then bought 100 shares at $x per share in the brokerage account... but much easier.

 

[Dash man]

If your tax rate is the same now as it will be at RMD time then it is mathematically the same outcome... but for many posters here, their tax rate earlier in retirement is much lower than it is later once pensions, SS and RMDs start, and in those very common cases it is not mathematically equivalent.

And the sunsetting of the TCJA after 2025 will affect tax rates for most of us.

 

[pb4uski]

There is that too.

 

[Alex The Great]

This is the way: if you are a single filer, take $12,500 or so from your traditional IRA annually. Take the rest of your income from a Roth, and/or from selling stock in a non-IRA brokerage (being sure to keep the amount of capital gains under the max to stay in the 0% cap gains tax zone). Take your standard deduction. You just withdrew $12,500 from a traditional IRA without owing tax on the withdrawal. (Married filers use different amounts, but can employ the same strategy.)

Do that for 10 years, and a single filer can pull about $125,000k out of their traditional IRA without paying income tax on it.

There may be more on the table if you do itemized deduction. For example, medical expenses above 7.5% AGI. As well as property tax deduction which suppose to come back when Trump's tax reform expire in 2026?