Automatic RMD

[Badger]

Many of you are so much more experienced and knowledgeable in personal finance than I am so I appreciate your comments. I was just good at living a frugal lifestyle and just lucky with investing.

My tIRA is with Vanguard and I was going to set up automatic RMD with them. The last few years I have been having the dividends from the IRA mutual fund swept into a IRA money market account which I use for the RMD. The money is then placed into a taxable money market account. So the shares of the mutual funds stay the same and I don't want to purchase more shares with the dividends.
Here is my question. This works well for me but I was wondering if there is any tax advantage either now or in the future for cashing in shares of the mutual fund instead.
Either way I don't need the RMD money for living expenses but would like to prevent increased taxes for a surviving spouse or children's inheritance.



Cheers!

 

[PaunchyPirate]

Many of you are so much more experienced and knowledgeable in personal finance than I am so I appreciate your comments. I was just good at living a frugal lifestyle and just lucky with investing.

My tIRA is with Vanguard and I was going to set up automatic RMD with them. The last few years I have been having the dividends from the IRA mutual fund swept into a IRA money market account which I use for the RMD. The money is then placed into a taxable money market account. So the shares of the mutual funds stay the same and I don't want to purchase more shares with the dividends.
Here is my question. This works well for me but I was wondering if there is any tax advantage either now or in the future for cashing in shares of the mutual fund instead.
Either way I don't need the RMD money for living expenses but would like to prevent increased taxes for a surviving spouse or children's inheritance.



Cheers!

I don't think there is any difference from a tax perspective. The taxation happens when the money leaves the IRA account, which will happen either way. An inherited IRA with money in the IRA money market or the IRA mutual fund will still face the same amount of taxation (and not until removed from the IRA).

I think your current approach is fine if the dividends provide enough for the RMD. If your money market is growing too large because the dividends are more than you need for the RMD, then you might wish to put some of it back in the mutual fund now and then to get better earnings.

 

[audreyh1]

No - no tax consequences in selling anything inside an IRA. What’s taxable is the amount withdrawn. It doesn’t matter where it came from inside the IRA.

 

[SecondCor521]

Either way I don't need the RMD money for living expenses but would like to prevent increased taxes for a surviving spouse or children's inheritance.

Others have correctly commented that withdrawals are taxed as ordinary income regardless of the source of the funds from inside the IRA.

Two other tax planning items would be good to consider:

First, if you have a Roth IRA and a trad IRA, it's smart to have the lower growth investments in the traditional and the higher growth investments in the traditional IRA. This way you reduce the growth of your RMDs (which you said you don't need) and shift the overall growth more towards the tax free Roth.

Second, consider holistically your heirs' tax situations and yours. If your heirs are in a significantly different tax bracket, it may make sense for you to take out even more than the RMD (or do Roth conversions) and pay taxes at your rate instead of theirs. You also may want to consider the SECURE Act - your heirs will generally have to drain their inherited IRAs in a total of 10 years after you pass away - so if you can divide your traditional IRA among more heirs rather than fewer the tax impact may be lessened overall because they will be less likely to be pushed into a higher bracket.

 

[sakowitzm]

Just a note that there's a mistake in SecondCor521's response. It says that it's smart to have the lower growth investments in the Traditional IRA and the higher growth investments (also!) in the Traditional IRA. That second part should say Roth IRA - higher growth in the Roth IRA.

 

[SecondCor521]

Just a note that there's a mistake in SecondCor521's response. It says that it's smart to have the lower growth investments in the Traditional IRA and the higher growth investments (also!) in the Traditional IRA. That second part should say Roth IRA - higher growth in the Roth IRA.

Thanks for the correction, and I agree with you. That's what I meant to say.

 

[pb4uski]

.... My tIRA is with Vanguard and I was going to set up automatic RMD with them. The last few years I have been having the dividends from the IRA mutual fund swept into a IRA money market account which I use for the RMD. The money is then placed into a taxable money market account. So the shares of the mutual funds stay the same and I don't want to purchase more shares with the dividends.
Here is my question. This works well for me but I was wondering if there is any tax advantage either now or in the future for cashing in shares of the mutual fund instead.
Either way I don't need the RMD money for living expenses but would like to prevent increased taxes for a surviving spouse or children's inheritance. ...

I'm not RMD age yet but mother is and that is what we do for her... all of her IRA money is in a single IRA account with Vanguard and I have it programmed so they withdraw her RMD each year on her birthday and it is transferred to her taxable account (after federal withholding). Works like a charm.

 

[RetireBy90]

I'm not RMD age yet but mother is and that is what we do for her... all of her IRA money is in a single IRA account with Vanguard and I have it programmed so they withdraw her RMD each year on her birthday and it is transferred to her taxable account (after federal withholding). Works like a charm.

This is also what I do with inherited or beneficiary IRA with Fidelity. Each year they pull RMD to taxable account where I can pull to checking when desired or invest as needed.