RMD Questions ????

[frayne]

Just starting to look into the RMD rabbit hole as I'm 67 this year and 70.5 isn't that far around the corner. In plugging some numbers into the Schwab RMD calculator it gives you a variable of percent growth of portfolio between 0-12%. What would be a good number and is better to fudge on the high side or the lower side as no one knows what the crystal ball holds ? Also from my understanding, the RMD has to be re-calculated every year based on the yearend number of the IRA, is my understanding correct ?

Thanks in advance and I'll no doubt have more questions as I can see some real possible goofy scenarios on RMD takes in a good market environment.

 

[REWahoo]

Also from my understanding, the RMD has to be re-calculated every year based on the yearend number of the IRA, is my understanding correct ?

Yes, your annual RMD calculation is a formula based on your age and the value of your IRA accounts on 12/31 each year.

Can't help you with your other questions on future portfolio increases - my flux capacitor is on the fritz.

 

[Souschef]

I am well into my RMD's, and with the market's performance in the last few years, even after taking my RMD, my next year's RMD has been higher.
As an example, my RMD for YE 2017 is 20% higher than my YE 2016.
You are correct about the recalculation. I have a spreadsheet set up for the calculations. I copied the IRS table into my spreadsheet, and use that for calculations annualy.
One way to avoid paying tax on pert of the RMD is to make Qualified Charitable Distributions (QCD) of part of the RMD.

 

[Hermit]

I am well into my RMD's, and with the market's performance in the last few years, even after taking my RMD, my next year's RMD has been higher.
As an example, my RMD for YE 2017 is 20% higher than my YE 2016.
You are correct about the recalculation. I have a spreadsheet set up for the calculations. I copied the IRS table into my spreadsheet, and use that for calculations annualy.
One way to avoid paying tax on pert of the RMD is to make Qualified Charitable Distributions (QCD) of part of the RMD.

I have done the same thing with a spread sheet. The spread sheet includes annual projected totals for taxable, deferred, tax free accounts, projected taxes, RMDs, QCDs, income, spending, etc. It looks a lot like the ORP tables. Each year I update with actual numbers and the spread sheet recalculates projections out to age 95. I use SSA inflation projections for inflation. I will start RMDs in a couple of years.

 

[mickeyd]

I have all of my IRA stash @ VG. They calculate what my annual RMD is and if I do not take it by the summertime, they will remind me that I need to be taking action of lose 50%. I just received my 2018 notice yesterday. Seems like my RMD for this year jumped up by quite a bit over last year.


My new problem is what to spend it on. DW will probably decide that one.

 

[bw5972]

Why does any RMD need to be spent? Can one not just pay the taxes due and reinvest in the exact same funds, security, bonds etc. that the money had been in, just now in a taxable brokerage account? If so, why all the machinations over RMDs.

 

[Hermit]

Why does any RMD need to be spent? Can one not just pay the taxes due and reinvest in the exact same funds, security, bonds etc. that the money had been in, just now in a taxable brokerage account? If so, why all the machinations over RMDs.

That is totally correct. The difference is really paying the taxes. If you are in a position where you have to withdraw from investments that are down to pay the taxes, that leaves you selling in a down market.

Another possibility is if you have committed future funds to a charity (which is my case) you can have the investment house write the RMD check to the charity (called a Qualified Charitable Distribution, QCD) and you don't pay taxes and it does not count toward your income for the year which can be quite painful with Medicare premiums. This only works from an IRA, not a 401k, etc. and there are other rules that must be followed. You can still be in a position that you may need to sell stocks when they are down to move the money to the charity. In this case its all your RMD, not just the taxes.
Planning in the prior year or two can make a difference.

 

[bingybear]

you are correct that the RMD is recalculated based on EOY IRA value and your age.
We make estimates of our portfolios all the time. For me my IRA estimates would be pretty low. But that is because most of my bond allocation is in the TIRAs. You need to estimate based on the AA in your TIRA only. No one can estimated the return without knowing this allocation.

 

[Souschef]

Why does any RMD need to be spent? Can one not just pay the taxes due and reinvest in the exact same funds, security, bonds etc. that the money had been in, just now in a taxable brokerage account? If so, why all the machinations over RMDs.

Because after rolling over some investments, It will take over 20 years to spend it down.
For my BIG birthday this year, I am treating myself to flying a P-51

 

[audreyh1]

Why does any RMD need to be spent? Can one not just pay the taxes due and reinvest in the exact same funds, security, bonds etc. that the money had been in, just now in a taxable brokerage account? If so, why all the machinations over RMDs.

You can even take it in kind at some brokerages. Move the security from your IRA to your taxable account, and the basis is established that day. Of course then you have to pay the taxes from somewhere else unless you sell part of it.

 

[meierlde]

You can even take it in kind at some brokerages. Move the security from your IRA to your taxable account, and the basis is established that day. Of course then you have to pay the taxes from somewhere else unless you sell part of it.

Indeed if a 401k is involved and you have company stock, there is a rule I am surprised congress did not catch last year, that you pay at capital gains rates for the increase in value from the time the stock was first purchased, and only at wage based rates for the original purchase price. You loose this if you rollover however. I do think it should be repealed but it appears the CEOs like the rule.

 

[Hermit]

Indeed if a 401k is involved and you have company stock, there is a rule I am surprised congress did not catch last year, that you pay at capital gains rates for the increase in value from the time the stock was first purchased, and only at wage based rates for the original purchase price. You loose this if you rollover however. I do think it should be repealed but it appears the CEOs like the rule.

Now I know why the Voya people specifically asked me how I wanted to transfer my company stocks. They didn't bother to explain my options. It was not a lot of money, but I am sure they were more than happy to see me forgo a few bucks while I moved my money to Vanguard.

 

[Independent]

That is totally correct. The difference is really paying the taxes. If you are in a position where you have to withdraw from investments that are down to pay the taxes, that leaves you selling in a down market.

I haven't given this much thought. At first glance, it seems that in a down market, my RMD is lower, so the amount of my taxes is lower.

It's a wash. Whether the market is up or down, I'll use the same number of shares to pay my taxes.

 

[audreyh1]

I haven't given this much thought. At first glance, it seems that in a down market, my RMD is lower, so the amount of my taxes is lower.

It's a wash. Whether the market is up or down, I'll use the same number of shares to pay my taxes.

Your RMD is lower a year later. Doesn’t affect the first RMD after a market swoon but does drop subsequent ones.

I remember them suspending RMDs for 2008, was it? For one year.*

I don’t worry about selling in a down market due to IRA withdrawal. Because a) I get to withdraw more shares to satisfy the RMD if required and b) I can always buy anything I sold right back in taxable accounts after IRA withdrawal.

Covering taxes in a down market is always a problem though. My instincts would be to move some IRA funds to a low volatility investment shortly after Dec 31 established the RMD if I didn’t want to use taxable account funds to pay the taxes. “Just in case”.

*Well no, the RMD requirement was suspended for 2009. People were still required to take their 2008 RMD which would have been based on the near peak value of Dec 31, 2007. If you waited until late in the year and held equities until the last minute that probably felt quite painful. In 2009 the RMD would have been based on the much lower Dec 31, 2008 value.
https://www.irs.gov/pub/irs-drop/n-09-09.pdf

But they couldn’t have waived the 2008 RMD in Dec 23 of 2008 because so many people had already taken them. I guess the thinking was to not make folks sell stocks during 2009 when they were down so much. Ironically, folk who skipped the RMD clearly didn’t need the funds. Regular folks probably had to draw for spending regardless.

 

[Onward]

RMD is recalculated based on EOY IRA value and your age

The age of your spouse (specifically, whether he/she is more than ten yrs younger than you) affects the RMD amount too.

 

[CindyBlue]

The age of your spouse (specifically, whether he/she is more than ten yrs younger than you) affects the RMD amount too.

Really? How does that work?

 

[kaneohe]

Really? How does that work?

https://www.irs.gov/pub/irs-pdf/p590b.pdf

see the tables in the appendix. Table III is the normal table used. As an extreme example, owner 115 y.o. would use a divisor of 1.9 which means more than half of the account would be needed for RMDs each yr. But Table II is used if the spouse is more than 10 yrs younger and are the sole beneficiaries.
The table is amusingly complete and shows that if a 115 y.o. had a 20 y.o. spouse, then the divisor is 63 so only about 1.6% RMD would be required.

 

[bingybear]

The age of your spouse (specifically, whether he/she is more than ten yrs younger than you) affects the RMD amount too.

Sorry, I tend to ignore this since DW is 2 months older.

 

[frayne]

Had to laugh when I read where you can reduce your RMDs by marrying a much younger woman. I doubt if this took into account cutting your portfolio in half as wife No.1 exits the picture to make way for much younger wife No.2 !

 

[CindyBlue]

https://www.irs.gov/pub/irs-pdf/p590b.pdf

see the tables in the appendix. Table III is the normal table used. As an extreme example, owner 115 y.o. would use a divisor of 1.9 which means more than half of the account would be needed for RMDs each yr. But Table II is used if the spouse is more than 10 yrs younger and are the sole beneficiaries.
The table is amusingly complete and shows that if a 115 y.o. had a 20 y.o. spouse, then the divisor is 63 so only about 1.6% RMD would be required.

Thanks! I have to figure out the months, since hubby is born in the year ten years before my birth year...could be close!

 

[Souschef]

https://www.irs.gov/pub/irs-pdf/p590b.pdf

see the tables in the appendix. Table III is the normal table used. As an extreme example, owner 115 y.o. would use a divisor of 1.9 which means more than half of the account would be needed for RMDs each yr. .

The catch is that is a series which will approach zero. For the fun of it, I took $10,000 and found out it would take 15 years to get to $1

 

[kaneohe]

Thanks! I have to figure out the months, since hubby is born in the year ten years before my birth year...could be close!

Unfortunately the table changes in a smooth analog fashion, so the difference depends on how much over 10 yrs different you are (not just whether you are over 10yrs) so it is unlikely to be a big difference in your case.

 

[CindyBlue]

Unfortunately the table changes in a smooth analog fashion, so the difference depends on how much over 10 yrs different you are (not just whether you are over 10yrs) so it is unlikely to be a big difference in your case.

So...so they do it by the year in which we were both born or the month in those years? For example, if he were born in November of 1980 and I was born in March of 1990 (not our real birth months or years - a girl has to keep some secrets, ya know!(grin!)), then the years are two years apart but the months put me 7 months short of being ten years younger than he is (did I do that right? Somebody check me!)

 

[kaneohe]

So...so they do it by the year in which we were both born or the month in those years? For example, if he were born in November of 1980 and I was born in March of 1990 (not our real birth months or years - a girl has to keep some secrets, ya know!(grin!)), then the years are two years apart but the months put me 7 months short of being ten years younger than he is (did I do that right? Somebody check me!)

The normal table (when age difference is less than 10 yrs) uses the age of the owner in whole yrs at yr end.....which is common practice for most (but not all) tax stuff. I guess I don't understand the 2 yrs comment...help!.....but at the end of 2018, he is 38 and you are 28 if the same convention holds so you are 10 yrs younger and not more than 10 yrs younger.

You can check the table and see that he were 70 and taking RMD, the divisor would be 27.4. If you were 11 yrs younger the divisor would be 28.1 instead, similar to what it would be if he were 69 (no such entry in the real table).

 

[CindyBlue]

The normal table (when age difference is less than 10 yrs) uses the age of the owner in whole yrs at yr end.....which is common practice for most (but not all) tax stuff. I guess I don't understand the 2 yrs comment...help!.....but at the end of 2018, he is 38 and you are 28 if the same convention holds so you are 10 yrs younger and not more than 10 yrs younger.

You can check the table and see that he were 70 and taking RMD, the divisor would be 27.4. If you were 11 yrs younger the divisor would be 28.1 instead, similar to what it would be if he were 69 (no such entry in the real table).

Got it! Great explanation! Thank you!
So I guess I have to be MORE than 10 years younger...oh, well...