RMD question

[Graybeard]

Rather than piggy back on someone else's thread I started this one.

I always have taken my RMD in early December. My reasoning was let those dollars continue to grow tax deferred. I think decades of "tax deferral" thinking is clouding what may now be a mistake. Allowing those dollars to grow all year just means my rollover IRA balance will be larger next year (assuming growth) plus the percentage increases each year for the RMD on a larger balance. I don't need or want the RMD for expenses in fact I have more than enough without the RMD and would be happy to reduce my taxable income, I'm in the 22% bracket. I take the RMD from the Vanguard Total Stock Market Index put the balance into my taxable account in the Vanguard Total Stock Market Index.

So now I'm thinking it makes more sense to take the RMD in January, pay the taxes on it and then put the balance into my taxable account in the Vanguard Total Stock Market Index as I would anyway. The growth over the year won't be taxed and the only tax would be on capital gains at 15%. I don't really understand taxes and have them done by a CPA but it seems like taking the RMD in January makes more sense than in December?

Is it a wash or does it make sense from a tax standpoint to get those dollars into the taxable account asap?

 

[braumeister]

If you really don't need the money and want to keep your taxes lower, consider donating the RMD amount to your favorite charities using QCDs.
That way you reduce your TIRA balance without paying any tax on it at all.

 

[street]

Yep, that is my plan in 4 years also. That is my way of thinking would be bettah of the two evils.

 

[disneysteve]

Apart from the taxes on the RMD itself, what about your overall tax picture? I use my RMD to true up our taxes for the year. In mid November, I put together our estimated income numbers for the year, run through them with our accountant, and he tells me what our taxes will be. We compare that to what we've already paid in and use withholding from the RMD to make up the difference. It wouldn't be possible to do that in January. Just something else to possibly think about.

 

[sengsational]

I'm with Steve. Even though I don't take RMD's yet, I always "do my taxes" in December. You're able to do "what-if" scenarios and iterate on magnitudes while watching the marginal and overall tax rates.

The difference in pre or post tax gains doesn't seem significant to me.

 

[pb4uski]

I would take it early because having the growth converts what would otherwise be qualified dividends and LTCG, both taxed at lower preferential tax rates, into ordinary income taxes at higher rates.

Have you considered QCDs? If you do, then later would be better in that you could do a higher QCD.

 

[pb4uski]

Apart from the taxes on the RMD itself, what about your overall tax picture? I use my RMD to true up our taxes for the year. In mid November, I put together our estimated income numbers for the year, run through them with our accountant, and he tells me what our taxes will be. We compare that to what we've already paid in and use withholding from the RMD to make up the difference. It wouldn't be possible to do that in January. Just something else to possibly think about.

You could do most of it in January, and then another one with 99% FWT in December and gave the best of both.

 

[audreyh1]

I would take it early because having the growth converts what would otherwise be qualified dividends and LTCG, both taxed at lower preferential tax rates, into ordinary income taxes at higher rates.

Have you considered QCDs? If you do, then later would be better in that you could do a higher QCD.

You might be able to do a higher QCD you never know.

In our case the amount of QCDs would not be driven by the growth in the IRA that year but rather by the RMD amount or some related consideration. So timing during the year is not an issue.

Personally I’m all in favor of doing QCDs and then pulling the remainder needed to meet the RMD from the IRA earlier rather than later and reinvest thus letting any (hopefully) growth happen in after tax accounts.

 

[braumeister]

In our case the amount of QCDs would not be driven by the growth in the IRA that year but rather by the RMD amount or some related consideration. So timing during the year is not an issue.

Yes, I'm fortunate in having my remaining TIRA balance low enough that I'm comfortable doing QCDs for a little more than the RMD amount. Works great for me.

 

[audreyh1]

Is it a wash or does it make sense from a tax standpoint to get those dollars into the taxable account asap?

When it comes down to it its probably a wash, but I would be motivated to get those funds out earlier for less growth in the IRA unless the IRA were relatively small.

There are other considerations to drive timing such as how you want to use the tax withholding opportunity. You don’t have to withhold just for your IRA but you can actually pay all of your estimated taxes for the year that way. And some folks wait until late in the year for this part instead of paying earlier.

 

[CardsFan]

I am in the "take it early in the year camp", which is what I currently do for my Roth conversions. It slows the growth a little.

 

[Graybeard]

When it comes down to it its probably a wash, but I would be motivated to get those funds out earlier for less growth in the IRA unless the IRA were relatively small.

There are other considerations to drive timing such as how you want to use the tax withholding opportunity. You don’t have to withhold just for your IRA but you can actually pay all of your estimated taxes for the year that way. And some folks wait until late in the year for this part instead of paying earlier.

The IRA is about $1.1M. I don't do estimated taxes, I w/h from my pension, not from SS and when the CPA does my taxes in March for 2024 I ask for an estimate of what I'll owe for 2025 and w/h in the RMD for what my pension w/h did not cover in 2025. That has been working since 2022. I have been writing off $3k/year for capital losses from a bond fund but all that loss will be used up filing for 2024 so for 2025 I probably need to increase my pension w/h or have SS w/h.

 

[ShokWaveRider]

The IRA is about $1.1M. I don't do estimated taxes, I w/h from my pension, not from SS and when the CPA does my taxes in March for 2024 I ask for an estimate of what I'll owe for 2025 and w/h in the RMD for what my pension w/h did not cover in 2025. That has been working since 2022. I have been writing off $3k/year for capital losses from a bond fund but all that loss will be used up filing for 2024 so for 2025 I probably need to increase my pension w/h or have SS w/h.

This is basically what we do too. Except I am our CPA. I withdraw our estimated tax burden in December from our IRA(s). We do not withhold anything from our SS & Pensions. The way things are going with RMDs being pushed out, we may not even get to the point that we will have to take them. What is it now ....... 75? Our SS and pensions cover all our needs. If in the future SS will not be taxable at all, getting rid of WEP was a good start, we should be laughing.

 

[Graybeard]

So the QCD seems like cutting off my nose to spite my face. What I mean by that is say my RMD is $44k which is close for 2024. If I pay taxes on that $44k I keep the rest, if I donate it to a charity I keep none of that.

How does giving away $44k to save say $10k ($44k * 0.22 ~ $10k and I keep the $34k) make sense? I mentioned I am in the 22% federal tax bracket, gross income ~ $88k. It isn't like I'm in a high tax bracket with hundreds of thousands in income?

I understand if you donate to charities then a QCD can make sense. I don't so I don't see how it benefits me.

 

[engineernerd]

Is it a wash or does it make sense from a tax standpoint to get those dollars into the taxable account asap?

I agree, in your situation January is best, with one caveat:

Someone else here mentioned using your RMD as a tax withholding vehicle (to free you from the hassle of doing quarterly estimated taxes). There is merit to that idea, if the RMD is big enough to pay your whole tax bill. If you don't care about that, then January is best.

 

[braumeister]

I understand if you donate to charities then a QCD can make sense. I don't so I don't see how it benefits me.

That's fine. I was going by your statement that you don't need the money, so my preference is to put it to work somewhere useful while lowering your overall taxes. If you'd rather just let it pile up, then ignore my suggestion.

 

[Graybeard]

I agree, in your situation January is best, with one caveat:

Someone else here mentioned using your RMD as a tax withholding vehicle (to free you from the hassle of doing quarterly estimated taxes). There is merit to that idea, if the RMD is big enough to pay your whole tax bill. If you don't care about that, then January is best.

I've never had an issue just w/h from my pension. It is not enough so when I take the RMD I w/h more than I need to making up the difference. This is an estimate of what the CPA says I should owe next year.

So say I w/h say $1k from my pension, she estimates I'll owe $1800, I w/h $800 + a bit more as I have been getting a lot of income from T bills and there are those cap gains that I won't know until year end. What I don't want to do is owe a penalty for w/h too little.

So what about my QCD question? It does not make sense to do a QCD in my situation from what I know. Gotta go do stuff so I'm not ignoring future posts, I just won't be back for a few hours.

Thanks for your posts.

 

[Graybeard]

That's fine. I was going by your statement that you don't need the money, so my preference is to put it to work somewhere useful while lowering your overall taxes. If you'd rather just let it pile up, then ignore my suggestion.

While I don't need the money I want to provide those who are my beneficiaries to have as much as possible.

 

[OldShooter]

... Is it a wash or does it make sense from a tax standpoint to get those dollars into the taxable account asap?

IMO this is the wrong question. Taxes are part of the equation but the goal should simply be to maximize the dollars in your pocket at the end of the day. Often (buying taxable bonds instead of munis, for example) maximizing the result may involve paying more taxes.

It's not an easy analysis but starting with a goal of minimizing taxes may take you to a less-profitable place.

 

[OldShooter]

... What I don't want to do is owe a penalty for w/h too little. ...

No problem. You don't have to estimate or worry about anything. Just make sure you have withheld the safe harbor amount. Easiest for us is to pay that amount via a tIRA distribution at 100% withholding early in December.

 

[audreyh1]

So the QCD seems like cutting off my nose to spite my face. What I mean by that is say my RMD is $44k which is close for 2024. If I pay taxes on that $44k I keep the rest, if I donate it to a charity I keep none of that.

How does giving away $44k to save say $10k ($44k * 0.22 ~ $10k and I keep the $34k) make sense? I mentioned I am in the 22% federal tax bracket, gross income ~ $88k. It isn't like I'm in a high tax bracket with hundreds of thousands in income?

I understand if you donate to charities then a QCD can make sense. I don't so I don't see how it benefits me.

If you don’t donate to qualified charitable orgs currently and prefer not to, then QCDs won’t help you.

 

[audreyh1]

If you want to avoid late tax payment penalties then it’s important to understand the safe harbor rules.

 

[Sunset]

This is basically what we do too. Except I am our CPA. I withdraw our estimated tax burden in December from our IRA(s). We do not withhold anything from our SS & Pensions. The way things are going with RMDs being pushed out, we may not even get to the point that we will have to take them. What is it now ....... 75? Our SS and pensions cover all our needs. If in the future SS will not be taxable at all, getting rid of WEP was a good start, we should be laughing.

Seems like the IRS thinks it's age 73.

from the IRS site:
"

Q3. When must I receive my required minimum distribution from my IRA? (updated Dec. 10, 2024)​

You must take your first required minimum distribution for the year in which you reach age 73. However, you can delay taking the first RMD until April 1 of the following year. If you reach age 73 in 2024, you must take your first RMD by April 1, 2025, and the second RMD by Dec. 31, 2025."

Retirement plan and IRA required minimum distributions FAQs | Internal Revenue Service

Find out about required minimum distributions on your retirement plan under Internal Revenue Code sections 401(a)(9), 408(a)(6) and 408(b)(3) and how much and when to withdraw.

www.irs.gov

 

[Gumby]

If you were born in 1960 or later, it is the year you turn 75 (subject to the next April provision)

 

[target2019]

So the QCD seems like cutting off my nose to spite my face. What I mean by that is say my RMD is $44k which is close for 2024. If I pay taxes on that $44k I keep the rest, if I donate it to a charity I keep none of that.

How does giving away $44k to save say $10k ($44k * 0.22 ~ $10k and I keep the $34k) make sense? I mentioned I am in the 22% federal tax bracket, gross income ~ $88k. It isn't like I'm in a high tax bracket with hundreds of thousands in income?

I understand if you donate to charities then a QCD can make sense. I don't so I don't see how it benefits me.

Most discussion about IRA withdrawals concerns bean counting, the rules, and what's optimum in a given situation.

Last year I sent a QCD to a registered 501c3 organization. It was me telling the organizer that I appreciate his efforts and time throughout the years. This was 2 years before required RMD starts.

Never crossed my mind to classify it as cutting off my nose.

To each their own.