RMD question on paying taxes

[street]

At the time of each conversion I should not have any loss in purchasing power if I pay my taxes from my taxable account. Right?

If I thinking right then my RMD portion I could roll right into the market and start earning (losing) again with out having any lose in shares etc.. Right?

Is this the best way to do this if one has enough cash to pay the taxes each year. Taxes could exceed 60K and that can be a problem for having that kind of cash on hand.

So, what are your thoughts and do you pay taxes? Pay from taxed accounts rather then take them out of your RMD full amount?

 

[Done]

You say “conversion” so I think you’re referring to a tax-deferred account where you have an RMD and also want to do a Roth conversion? The RMD has to be satisfied regardless of whether you convert any funds, so the RMD will go into a taxable account. You can do what you want with that money, including invest, pay taxes or have taxes withheld directly. Once distributed, there is no difference between the RMD and other taxable funds.

However, it’s best to not have taxes withheld on the Roth conversion amount, as this would reduce the amount you add to the Roth.

 

[ducky911]

Question has nothing to do with Roth.
It is more to do with take the money out jan 1 or dec 31st.

For me ,still two years away, but I would tend to pay taxes with other money and let funds stay and earn in ira as long as possible.

 

[street]

^ I'm a slow learner you may have answered that question but not sure totally.
When I start RMD is it better to pay those taxes from CD's/Savings etc. rather then have the taxes taken out of the full amount from the RMD. I want to roll that money right into the market index fund/mutual fund account etc.. In doing the full transfer without any taxes with held each conversion should not have any loss in purchasing power if I pay my taxes from my taxable account. Right?

Wouldn't I gain more from rolling the full amount in a taxable market account then having taxes taken right of the top of the RMD amount?

I would be losing many shares that took time to acquire over the years. In doing so I wouldn't have to buy back shares.

What am I missing and am I thinking this through the right way??

 

[CRLLS]

It depends. Do you not consider your "taxable account" as having any "purchasing power"? At the time of RMDs, putting 100% of that into the market account and pay taxes from another account is the same as putting, say 80% of the RMD into the market account, having 20% withheld for taxes, and then moving that same amount from your "other" account into your market account. Both accounts are taxable. and the end result has the same purchasing power. It all depends on what you want as the target balance between CD's/Savings, and taxable market accounts, etc.

 

[street]

So rolling the full amount of RMD to a ROTH I understand is a good decision. If I pay the tax from CD accounts wouldn't that be a wise decision instead of basically selling stocks from RMD to pay for taxes?? I wouldn't lose those shares and would have more shares to reinvest.

 

[Done]

Again, you have to withdraw the RMD (or have it withheld for estimated taxes). That amount cannot be converted to a Roth. You can choose to Roth-convert additional funds if you want.

For the RMD amount, just think of this amount as cash once it comes out of your tax-deferred account. You can choose to invest it, spend it or pay taxes. It doesn’t matter what it used to be invested in, but you may decide you want to have a certain amount invested based on your overall plan (asset allocation, the mix of stocks/bonds/cash you prefer to hold). If you choose to invest it, you can buy shares of anything you want, so don't feel restricted to the investments you used to own.

Since you'll have taxes due, you'll also want to make sure you either pay sufficient estimated taxes or have taxes withheld. If you have some of the RMD withheld, it is treated as if the estimated taxes were paid evenly throughout the year, so some people prefer to do it that way. You can also choose to take your RMD early or late in the year, depending on your needs and whether you prefer the amount and its gains to stay tax-deferred for a longer period.

Deciding whether you should do a Roth conversion with additional funds is another story. I would suggest reading more about this or consulting an advisor, as it can be a complicated decision.

 

[HpRyder]

When you take an RMD, you've withdrawn money from your tIRA and you now have cash. This money is fungible, you can do anything you want with that money (pay tax, invest, save, pay bills, etc.). You can also at the time you take the RMD indicate what Federal & state tax you want to pay from the RMD funds. Similar to an employee salary pay stub deduction of pay tax as you receive funds.

Vanguard allows you to pay up to 99% of the RMD money to IRS and or state. The other 1% Vanguard pays to you.

Since the money is fungible, pay tax from this money or taking this money and paying tax from CD or investments is all the same. You can take the money, not immediately pay any tax (but pay the tax as part of your April 15 filing) and immediately (as soon as the funds become collected funds) invest the money however you please.

Pay the tax at the time of RMD withdrawal or pay the tax later, but pay the tax you will.

 

[street]

^ thanks. The part I was confused on was when the RMD is withdrawn paid to me, it has already been sold. The shares have been sold and I can rebuy and invest once again but really it is a new game starting over. I knew I wasn't thinking right on that. Lol

Thanks

 

[kgtest]

It depends. Do you not consider your "taxable account" as having any "purchasing power"? At the time of RMDs, putting 100% of that into the market account and pay taxes from another account is the same as putting, say 80% of the RMD into the market account, having 20% withheld for taxes, and then moving that same amount from your "other" account into your market account. Both accounts are taxable. and the end result has the same purchasing power. It all depends on what you want as the target balance between CD's/Savings, and taxable market accounts, etc.

Good point. Exact same purchase power...but different mechanics. My ole man just paid the tax on conversion from his taxable because he wants to use cash to blow some dough. He is NOT at RMD yet, so taking from cash would mean he would have less cash available as his roth is not quite 5 years old.

So there is the gotcha of if you convert and expect to just take the money from roth to pay tax later, rather than taxable...it needs to be accessible after an established 5 year account rule etc.

 

[Animorph]

For a normal RMD, which is a required minimum distribution when you are 72 or older and may not be Roth converted, I would have taxes withheld. It's just a little better than paying quarterly estimated taxes, with less hassle at tax time. The remainder of the RMD would be added to your taxable account. So either way, you end up with the same (RMD - taxes) in your taxable account. If you are not paying equal quarterly estimated taxes, giving the IRS a tax payment from your taxable account only when you make tIRA/401k withdrawals will complicate your taxes, requiring calculations for each quarter instead of the full year.

For a Roth conversion, which you can do as an added amount after RMD's (if any) are satisfied, you want to pay the taxes with only taxable account funds and place the full withdrawal into the Roth account. Ideally again, pay those taxes in equal quarterly estimated tax payments to simplify tax time.

The IRS makes a big deal about matching tax payments to income throughout the year, at least quarterly. For some reason, withheld taxes from tIRA withdrawals count as being paid equally throughout the year. That's the most useful treatment. If you just make random payments to the IRS it will be up to you to show (on a standard form) that taxes paid matched taxes due for each quarter of the year. Not a disaster, but it can mean more work at tax time.

 

[audreyh1]

^ I'm a slow learner you may have answered that question but not sure totally.
When I start RMD is it better to pay those taxes from CD's/Savings etc. rather then have the taxes taken out of the full amount from the RMD. I want to roll that money right into the market index fund/mutual fund account etc.. In doing the full transfer without any taxes with held each conversion should not have any loss in purchasing power if I pay my taxes from my taxable account. Right?

Wouldn't I gain more from rolling the full amount in a taxable market account then having taxes taken right of the top of the RMD amount?

I would be losing many shares that took time to acquire over the years. In doing so I wouldn't have to buy back shares.

What am I missing and am I thinking this through the right way??

Unless you are doing a Roth conversion, it makes no difference at all since the RMD and funds to pay taxes end up in the same pile of taxable accounts. And you can’t do a Roth conversion with an RMD.

 

[audreyh1]

So rolling the full amount of RMD to a ROTH I understand is a good decision. If I pay the tax from CD accounts wouldn't that be a wise decision instead of basically selling stocks from RMD to pay for taxes?? I wouldn't lose those shares and would have more shares to reinvest.

You now know that you are specifically not allowed to do this?

 

[street]

Thanks to all of you for your help and clearing things up. I beleive I get it and who knows what will change down the road. One change already is the required age to start RMD.