When & How do you take RMD?

[SecondCor521]

Do some here have them take the taxes out before they send the check?? How can it be trued up with markets changing till the first of each year?

Vanguard's service allows you to automatically withhold X% in federal taxes from each RMD. That's what my Dad does.

An RMD for any given year is calculated based on the 12/31 value of the prior year divided by a divisor which is essentially the RMD owner's life expectancy.

So my Dad's RMD for 2021 is based on his 12/31/2020 IRA value divided by his divisor, and then divided by 12 for monthly.

What the markets do this year don't affect the RMD amount in any way (other than affecting the 12/31/2021 value, which will be used for 2022 RMDs).

 

[CRLLS]

This is another of those win/win discussions. OP never mentioned if they are living off the RMD or just reinvesting in a taxable account. I think that makes a small difference. IF it is for monthly spending purposes, I am an "each month" withdrawal kind of guy. IF your planning on doing Roth conversions past RMD time, remember that RMD's must be withdrawn first. Then the Roth conversion can happen.

For those who promote an "end of year" withdrawal over a "first of year", doesn't the benefit of added earnings only affect the first year's RMD? I mean there is virtually no difference in an ongoing plan whether you withdraw on 12/31 or the next day on 1/1. Several years into RMD, I suspect it becomes inconsequential. I admit I haven't done the math. And again, the numbers may change depending on whether one is depositing it into a taxable account or spending it.

 

[audreyh1]

I really dislike even thinking about it. Not that I have to pay the taxes, just that it all works out so I pay all need too.

Do some here have them take the taxes out before they send the check?? How can it be trued up with markets changing till the first of each year?

I think Street’s concern about market changes if you wait until late is that you could be selling assets that have dropped in value since the start of the year when your RMD amount was determined (prior Dec 31 value).

This can be handled in various ways. You can set aside the required funds inside the IRA early in each year and use those to fulfill RMDs during the year. You could draw from fixed income only and rebalance at the end of each year. You could decide it doesn’t matter and sell proportionally from each fund for each RMD during the year - most brokerages allow this particular scenario as it’s the easiest.

A key point is that the amount that has to be withdrawn each year is fixed by your age (at year end) and the prior Dec 31 value of your IRA. So you just have to decide which IRA funds it is going to be withdrawn from during the year.

 

[CRLLS]

audreyh1, that market change works both ways. Yes, there is risk by waiting until the end of year. Since market typically rises over the long term, I expect it would more often work in your favor. On the other hand, there is no arguing at minimum, setting that amount aside at the beginning of the year is the "safer" route for those who are risk averse . Then it could be paid whatever time of year you chose with virtually no affect one way or the other.

 

[audreyh1]

Unless someone has 100% equities in their IRA you’d think they would have enough low volatility investments to cover their RMD which is under 5% of the portfolio value until you reach 79.

 

[street]

Trust me, the worst thing about that time of life is NOT RMDs, it's being that old! Your custodian will tell you exactly how much you have to take to keep the Feds happy (with you.) I personally do a hefty (usually 20% withholding) on my RMD. That typically covers most of my un-withheld income for tax purposes. You'll figure it out easily and will give thanks that you have a 1st world problem (taking those darned RMDs)! YMMV

LOL!
Your making it easy and I like easy and simple the older I get! Thanks

 

[LRDave]

All inherited IRAs require ANY changes be made by a Fido rep. Traditional RMDs 100K+ require Fido intervention for ALL changes. We split that one 50/50 and can now make changes.

Hmmmm.... are you sure? I did DW's RMD from her mother's inherited IRA online in 2019.

 

[street]

I think Street’s concern about market changes if you wait until late is that you could be selling assets that have dropped in value since the start of the year when your RMD amount was determined (prior Dec 31 value).

This can be handled in various ways. You can set aside the required funds inside the IRA early in each year and use those to fulfill RMDs during the year. You could draw from fixed income only and rebalance at the end of each year. You could decide it doesn’t matter and sell proportionally from each fund for each RMD during the year - most brokerages allow this particular scenario as it’s the easiest.

A key point is that the amount that has to be withdrawn each year is fixed by your age (at year end) and the prior Dec 31 value of your IRA. So you just have to decide which IRA funds it is going to be withdrawn from during the year.

Thank you also for the detailed RMD question I asked.

I would want an equal distribution of funds so to remain in that 75 to 80% equity status. In my case all this money at RDM time will be left for heirs. I don't plan of using it myself but of course life can change and that plan not fulfilled.
Still kind of a scary time for me when RMD are here.

 

[ERObjd]

Never, I converted old roth IRA into taxable Vanguard index fund when I retired .I have no tax advantaged savings. All of my income (Retired military and VA disability) is considered "unearned" so I am not eligible for IRA and don't have to worry about RMD.

 

[audreyh1]

Thank you also for the detailed RMD question I asked.

I would want an equal distribution of funds so to remain in that 75 to 80% equity status. In my case all this money at RDM time will be left for heirs. I don't plan of using it myself but of course life can change and that plan not fulfilled.
Still kind of a scary time for me when RMD are here.

If at RMD time you decide to reinvest the proceeds in your taxable account for your heirs, it doesn’t matter so much if equities are up or down. Yes, you’ll be out any withheld taxes, but in the long run either you or your heirs would have to pay those IRA withdrawal taxes anyway.

Fidelity even lets you withdraw assets in kind, so you aren’t actually selling anything, just transferring shares from the IRA to your taxable account. In this case, however, you won’t be able to withhold any federal taxes, and will have to pay estimated taxes from your non IRA funds.

 

[misanman]

Traditional RMDs 100K+ require Fido intervention for ALL changes.

Unfortunately, my RMD amount is less than $100,000/year so that is the reason I didn't run into this particular issue.

 

[street]

If at RMD time you decide to reinvest the proceeds in your taxable account for your heirs, it doesn’t matter so much if equities are up or down. Yes, you’ll be out any withheld taxes, but in the long run either you or your heirs would have to pay those IRA withdrawal taxes anyway.

Fidelity even lets you withdraw assets in kind, so you aren’t actually selling anything, just transferring shares from the IRS to your taxable account. In this case, however, you won’t be able to withhold any federal taxes, and will have to pay estimated taxes from your non IRA funds.

Thanks so much for that information. I'm not sure what I would do at times with out the intelligence and knowledge you people have.

 

[grasshopper]

I would have been taking RMD this year until the law change. Since I had already allocated the dollars, I just made the amount a Roth conversion. I did the conversion in January.

 

[TrvlBug]

Hmmmm.... are you sure? I did DW's RMD from her mother's inherited IRA online in 2019.

Yes. I went in to change the withdrawal date from Q4 to January. I received notification that I could not make the change online and to contact a rep. The rep advised that any and all changes to an inherited IRA cannot be made online and must be made by a rep. My inherited IRA was set up 15 years ago and this is the first time I've made a change. DH's about 4 years ago and again, first time we've attempted a change.

What type of change did you make?

 

[Jerry1]

Our assets are 100% tIRA now. We draw cash ad hoc as we need it during the year to supplement SS, pay property taxes, QCDs, etc. Zero income tax withholding. Then in early December we pay safe harbor income taxes via tIRA withdrawals @ 100% withholding. After that we finish up with a draw to hit the RMD.

I like this method. I’ve just about used up all my after tax money and while not RMD’s, I’ll be drawing mostly from my tIRA. Since I don’t have to worry about managing income, my only reason to pay attention to my withdrawals is to estimate my taxes. Paying safe harbor seems easy and the way to go since I don’t care if I have to pay or if I get a refund. I just don’t want to pay a penalty.

 

[donheff]

DW's big RMDs are coming up in a few years so this thread is a helpful primer. I like the idea of automated monthly payments to keep things simple but it does seem like that could complicate getting the tax withholding right when taking RMDs from multiple accounts. Old Shooter's approach of paying the safe harbor amount in a single 100% withheld withdrawal from one IRA seems like a sensible approach. Maybe set most accounts and my pension to zero withholding and set one IRA account aside for taxes. I currently have all of our estimated taxes including DW's pension and SS, and all of our anticipated dividend and CG taxes, withheld from my pension. But setting it all into one annual payments is appealing.

 

[Midpack]

Thanks for answering a question I hadn’t thought of yet. I’ll plan on quarterly, if I can automate the withdrawals at VG all the better.

 

[audreyh1]

I like the idea of automated monthly payments to keep things simple but it does seem like that could complicate getting the tax withholding right when taking RMDs from multiple accounts.

For multiple IRAs, you don’t have take the RMD amount from each account, you can take it from one account, as long as the total amount meets the RMD requirement.

Nevertheless, we each plan to merge our IRAs into a single account (each) to simplify RMD calculations and withdrawals and facilitate automation.

Or maybe you meant multiple accounts as in RMDs for each of you. I guess you just have to split required withholding in some manner.

 

[jerryo]

I have three retirement accounts, one federal TSP and two with brokers (Fidelity and T Rowe, and started taking my RMD's in 2019.

Since each institution calculates my RMD based on their 12/31 balance, I find it easiest to take RMD's from each of the three accounts.

The RMD from TSP was easiest to take/automate as monthly withdrawals. I have them withhold 20% for taxes and transfer the remainder directly to my checking account. Since it's hard to stop and re-stop monthly payments from TSP (must be done by mail), I just had them keep paying through 2020, despite the fact that their was an RMD holiday because of COVID.

I've automated the RMD's my retirement brokerage accounts to be paid each year in early December (to maximize earnings). I also have the brokerages withhold 20% for taxes and then just transfer the remainder to my after-tax accounts. It was fairly easy to have the brokerages skip transferring in 2020, so I did.

This was a bit nerve-wracking to set up (and I will re-check with my brokers this fall to make sure the 2021 withdrawals are in place), but seems to be working fine.

 

[phil1ben]

I do the RMD for my 88 year old mother who fortunately does not need the income. She normally takes the RMD in full in January but decided to wait this year (2021) to see if Biden decides again to suspend the requirement.

 

[OldShooter]

... Old Shooter's approach of paying the safe harbor amount in a single 100% withheld withdrawal from one IRA seems like a sensible approach. ...

Just for the record, I am not smart enough to have come up with that idea, so I won't claim it as "my approach." I got the idea here on the forum, but sorry to say I can't remember who to thank.

On a related note I just roughed out our 2020 taxes and it looks like the safe harbor 110% payment last month resulted in an overpayment of about 15%. No big deal in this interest rate environment. Also, give the resurrection of RMDs, the safe harbor payment for 2021 taxes will probably result in an underpayment. So maybe even a wash on financing the government for two or three months.

 

[Koolau]

I do the RMD for my 88 year old mother who fortunately does not need the income. She normally takes the RMD in full in January but decided to wait this year (2021) to see if Biden decides again to suspend the requirement.

That sounds like a wise approach. Good on you for looking after your mother's financial welfare.

Now, here's one you don't hear too often on ER Forum: I actually NEED the money! I'll be taking my RMD (and a bit more) for the year's expenses not covered by SS and modest pension. YMMV

 

[RetireeRobert]

I do the RMD for my 88 year old mother who fortunately does not need the income. She normally takes the RMD in full in January but decided to wait this year (2021) to see if Biden decides again to suspend the requirement.

Hadn't thought of that, another waiver of RMD's for 2021. I kind of suspect though, that instead of another RMD reprieve, IRA owners might face some more stringent and more taxing rules changes proposed.

 

[wolf]

No worries, no calcualting. Just pay the safe harbor amount; 100% or 110% of previous year's taxes. Little hassle: Pay in December by 100% withholding from a tIRA withdrawal.

Oldshooter. Just to clarify. Instead of paying estimated taxes. You take a
IRA distribution in December, (previous years $ tax due).
And have the entire distribution, withheld. By claiming 100%
Withholding. Never thought of that. I've been sending in
estimated checks 4 times each year. Pain. Having to remember.

And there is no "penalty" ? The IRS, does not get "upset", having to wait the entire year to receive
estimated taxes.

Also, what does the small " t ", in tIRA stand for ? Thanks....

 

[OldShooter]

Oldshooter. Just to clarify. Instead of paying estimated taxes. You take a
IRA distribution in December, (previous years $ tax due).
And have the entire distribution, withheld. By claiming 100%
Withholding. Never thought of that. I've been sending in
estimated checks 4 times each year. Pain. Having to remember.

Also, what does the small " t ", in tIRA stand for ? Thanks....

Yup, that's pretty much it. The safe harbor is either 100% or 110% of previous year taxes due depending on previous year's income. Same-o for our state. So I just pull out the old tax return, figure the amounts and that's it. 2 IRAs x state, federal = 4 transactions. In the fine print, Schwab software doesn't permit 100% withholding so the withheld amount is something like 99%. No dates really to remember except to notice it's December. After the tax payments, we can draw anything more needed to satisfy RMD. tIRA seems to be the lingo around her for taxable IRA.

This is one of the more valuable things I have learned on the forum here.