When and how to take RMD

[disneysteve]

This year, 2022, I have to start RMDs from an inherited IRA. I qualify for the exemption to take it over my life expectancy, not 10 years.

The account is with Vanguard. They apparently have a system to set it up automatically. Are any of you familiar with that? Pros and cons?

How about when to take the distribution? Late in the year to maximize tax-sheltered growth or does it not really matter?

Any advice would be appreciated. Thanks.

 

[MBAustin]

I use the Vanguard RMD calculation for my inherited IRA but decide when to take it each year on my own. I use it for living expenses so I don't have to tap other accounts so it just depends on when I need to replenish our spending cash bucket each year.

 

[SecondCor521]

I'm sorry for your loss.

My Dad's IRA is at Vanguard, he has used their RMD service for a number of years. Because I have a POA for my Dad, I get to see that part of their website and how it works.

I think it works extremely well. Every year they recalculate his RMD amount for him. The calculations are on their website to review at any time.

In his case, he has it set up to take 1/12th of the RMD every month on the 15th. Each month, the amount is automatically sold from his IRA, federal taxes are withheld, and the remainder is put into his Vanguard taxable account.

He is able to set any integer percentage as federal tax withholding, and he can change that whenever he wants or needs to.

I think, but don't know, that you can choose different distribution schedules if you don't like monthly. I'd guess they support quarterly and annual schedules.

As far as when to take it, there are pros and cons to early or late. I think my Dad just does it monthly because his expenses are pretty even throughout the year and his RMD is the majority of his cash flow, so it's convenient that way. I personally don't think it matters much.

 

[steelyman]

I take my IIRA RMDs (at Fidelity) early in January annually. Their calculations match mine exactly and the dollar amount is determined at the end of the preceding year so won’t change.

I like getting it done and in my books but I can understand why people might want to capture possible gains by waiting to withdraw.

 

[OldShooter]

... Any advice would be appreciated. ...

My advice -- pretty much ignore it.

There is nothing special about an RMD. It is simply a number. At the end of the year, you must have taken at least the RMD amount from your tIRAs.

Depending on what assets you sell to take your distributions, you are making some degree of a market timing decision. Think equities will rise during the year? Wait until December to sell and take a distribution. Don't want to risk a decline in equities? Sell in January and take distributions during the year pending a December check against the RMD number.

Since the RMD is calculated based on prior year-end numbers, the brokerage houses can be helpful in giving us the number for each account. Your number, though. is the total of all tIRA RMD numbers. The distribution itself can be taken from any or all of them. So we are back to the December check: At the end of the year, you must have taken at least the RMD amount from your tIRAs.

We basically ignore our RMD numbers until December, taking what we need when we need it during the year. Then, if we haven't taken enough, we take some more.

IOW, RMDs are no big deal. The big deal, actually, is to maximize the use of QCDs when taking distributions. That's the one to think through and avoid mistakes.

***** Edit: I brain-faded on the fact that this is an inherited RMD. That makes the logistics a little more complicated and the RMD for that account must come from that account. My comments are/were more about the general RMD problem. Sorry about any confusion.

 

[pacergal]

I have a small inherited IRA from my Dad.
I take the distribution in December and give it to my kids for Christmas. They can use it more than I need it.

 

[GalaxyBoy]

I use my inherited IRA RMD for tax withholding so I wait until late in the year so I have a pretty good idea how much to take out. IRS treats withholding on 1099-R as if it were spread over the entire year which might help avoid paying estimated taxes.

 

[swakyaby]

I wait until December for exactly the same reason Galaxyboy does—-to determine how much withholding for federal and state taxes.

My inherited IRAs were initially at 2 different firms, so I consolidated them at Fidelity for simplicity. They automatically withdraw my RMD on the month and day I specified, Dec 1. It’s a convenient worry-free service.

 

[TheWizard]

I have no inherited IRA but just started RMDs from my 403(b).
Similar to SecondCor's dad, I take 1/12 of my RMD around the 20th of each month, taken pro rata from my mix of investments.

I have pension/annuity income hitting my checking account on the 1st of each month, SS between the 8th and 14th, and now RMD around the 20th, so my checking account is pretty happy nowadays.

For the past few years before RMDs started, I've been investing excess retirement income from the other two sources into my taxable investment account.
So I can expect my cash flow into that account to increase a bit now.

Note all three of my retirement cash streams get commingled in my checking account, from which various bills get paid as they arrive. I periodically move the excess beyond around $10,000 into my Vanguard settlement account.
So I'm not reinvesting my SS or my RMD; the money is all commingled...

 

[Badger]

I used to take the RMD myself through Vanguard and use their calculation tables. Now I have it set up for both my wife and me. Hers is done on one of the solstice and mine on the other. It's just easier for me to remember. It then goes into a MM fund to draw from when ever we need it.
If you want to do automatic withdrawal or dictate how much then it is as easy as a phone call.



Cheers!

 

[bizlady]

My elderly (late 80's) mother (widowed) use to take it in Dec. I encouraged her to start take in Jan so that in the event she dies late in a given year, it is handled and the penalty avoided. That, and she then has the money for the year to live on. Also she now takes advantage of the QCD for her church donations in January for the year.

 

[disneysteve]

My elderly (late 80's) mother (widowed) use to take it in Dec. I encouraged her to start take in Jan so that in the event she dies late in a given year, it is handled and the penalty avoided. That, and she then has the money for the year to live on.

Well hopefully the first reason won't apply to me for a long time.

As for the 2nd reason, it really doesn't matter if you take it in December or January (or April or July for that matter). You still have the money to spend in the months that follow.

Since I'm not yet retired and don't need the money, I figure I'll take it as late in the year as I can, as long as I keep the tax impact of that in mind.

 

[Sue J]

I've had my Inherited IRA at Vanguard since 2016. They calculate the RMD for you. I don't take monthly withdrawls since we don't need the income. I usually don't even think about it until later in the year and then I take the whole amount, looking for a high in the market, but honestly, I'm not all that good at it!

A nice tip I learned here is what a couple other posters mentioned, Fed tax withheld is counted as withheld for all year, so in 2021 I withheld 95% of the RMD to make up for income I had all year that never had enough withheld.

Here is another question to ask while we are on the subject of RMDs. I have mine invested in a couple of balanced funds and then also Total Stock Market. All are set to have Dividends and Capital Gains reinvested. When my Dad was alive he didn't reinvest, those went to his cash sweep account and he withdrew from there periodically for income.

Is there any reason that I should or should not be reinvesting these? I understand that if I wait and get near the end of the year and the values are down that I have to sell at a low point. Just curious if there is a rule of thumb here.

 

[SecondCor521]

Here is another question to ask while we are on the subject of RMDs. I have mine invested in a couple of balanced funds and then also Total Stock Market. All are set to have Dividends and Capital Gains reinvested. When my Dad was alive he didn't reinvest, those went to his cash sweep account and he withdrew from there periodically for income.

Is there any reason that I should or should not be reinvesting these? I understand that if I wait and get near the end of the year and the values are down that I have to sell at a low point. Just curious if there is a rule of thumb here.

I can think of reasons to do it both ways:

1. Reinvesting avoids having idle cash. For people like me who have grown up in a golden age of investing, seeing cash just sit there seems unproductive.

2. Having some cash, though, can be helpful if someone wants to market time (if they think they can guess better when to buy rather than having it happen at dividend reinvestment time), or it may be helpful to even out distributions across multiple heirs.

3. Reinvesting keeps the asset allocation closer to static than not. Which is good if you're trying to maintain an AA, and not good if you're wanting to change it over time.

Personally I think most people in my family have dividends automatically reinvested in tax-deferred accounts and in taxable accounts for those of us still working and accumulating. For the retired among us, we typically have dividends paid out into checking or savings and those just get spent. So that would be our rule of thumb.

 

[The Cosmic Avenger]

I have two inherited IRAs with Fidelity, but it's much the same in that I also use their calculations (although I double-checked this year to make sure they are using the new tables...they are), and I set up the automated distribution to take them at the beginning of December.

My reasoning for December was that 1) yes, it can go up or down, but it will probably be more up than down, 2) either way, I'll just try to take them at the same time every year, like a macro DCA, 3) I originally used some for padding our holiday budget, then for our end-of-year charitable giving, and now for college tuition, and 4) if an emergency ever comes up, I could manually withdraw the RMD then and there, so it feels like it gave me more flexibility.

But honestly, going back to #2, I don't think it matters, as long as you don't try to time it based on the market, just pick a plan and stick with it. I don't consider #4 market timing, as I would be more concerned with an emergency expense than the (hopefully, relatively) minor ups and downs during that year.

 

[scrabbler1]

I use my inherited IRA RMD for tax withholding so I wait until late in the year so I have a pretty good idea how much to take out. IRS treats withholding on 1099-R as if it were spread over the entire year which might help avoid paying estimated taxes.

My (snake-bit) friend has an inherited IRA. I help manage his portfolio, so we use some of the RMD to pay taxes via 1099R withholding, like you do. We wait until the end of the year when his tax situation is most clear.

The assets within his inherited IRA generate cash throughout the year. That cash becomes high enough by the end of the year so we don't have to sell anything to meet the RMD. After 9 years, that crossover point where the cash generated during the year (along with any carryover excess) won't be enough to cover the RMD is getting closer and closer. We got a small reprieve when the life expectancy tables changed for 2022, adding 2 years, so the divisor in the RMD's calculation goes up and the RMD goes down, further delaying that crossover point.