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Good Day Fine Folk!

I have an inherited IRA that I need to take RMDs on based on my life expectancy table, my first RMD was in 2017. I've seen it mentioned on here that folks use dividends to fund a money market account for RMD purposes so they can avoid selling shares low to come up with the money, this seems like a sound plan to me but what if my holding(s) that produce dividends (VTSAX) do not produce enough to meet my RMD? What's the next best way to fund the RMDs? Should I have purchased less and left some in a money market account? That seems like it would work this year but what about in subsequent years?

Thanks in advance for all of your insight.
Be well!
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I have an inherited IRA that I need to take RMDs on based on my life expectancy table, my first RMD was in 2017. I've seen it mentioned on here that folks use dividends to fund a money market account for RMD purposes so they can avoid selling shares low to come up with the money, this seems like a sound plan to me but what if my holding(s) that produce dividends (VTSAX) do not produce enough to meet my RMD?

It may be a sound plan until you hit your mid to late 70s (when RMDs will start to hit 4% - 5% of the account balance), but it's probably not going to hold up a lot longer than that, unless you have your accounts invested mostly in high rate (aka junk) debt, or interest rates go up a lot before you starting having to take out RMDs higher than 5%

What's the next best way to fund the RMDs? Should I have purchased less and left some in a money market account? That seems like it would work this year but what about in subsequent years?

If you don't need the cash for expenses (including taxes on the RMDs), then you can just transfer the required amount of VTSAX to a taxable account. That's called doing an in-kind distribution.

If you do need some/all of the cash for expenses, assuming that you have a desired asset allocation (be it 60/40, 80/20 or pretty much anything other than 100/0), then you can rebalance by selling enough of the higher performing assets to get back to the desired allocation, and use some/all of that cash generated from the sale to fund your RMD.

If your desired allocation is 100/0, or if the rebalancing doesn't generate enough cash to fund the RMD, then you will need to sell assets, keeping your desired allocation in mind.

I would also suggest that you should be looking at your asset allocation across all of your accounts, not just in this particular account. That might allow you to invest more of this particular account in income generating investments so that you can use dividends from the account to fund the RMDs as long as possible, or at least until you hit 70 1/2 and have to start taking RMDs from all of your accounts, not just the inherited IRA.

AJ
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First come up with an overall investment strategy, then optimize for taxes.
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My current strategy/AA is a simple 2 fund approach of about 80% in total us stock index and 20% in total international index (actually more than 2 funds because I have these similar funds with a few different brokerages). I am in my early thirties now and will consider adding bonds to my portfolio once I get into my forties.
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If you don't need the cash for expenses (including taxes on the RMDs), then you can just transfer the required amount of VTSAX to a taxable account. That's called doing an in-kind distribution.

Last year I used my RMD to fund our roth IRAs, I planned to do that again. When the RMD becomes large enough that there is excess, I imagine I could transfer the remaining balance to a brokerage account in kind.
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I have an inherited IRA that I need to take RMDs on based on my life expectancy table, my first RMD was in 2017.

I infer: This is inherited from a non-spouse, and you need to take RMDs even though you may be below normal retirement age. If this conclusion is incorrect, ignore the rest of what I'm about to say.

I've seen it mentioned on here that folks use dividends to fund a money market account for RMD purposes so they can avoid selling shares low to come up with the money

This strategy can only work as long as your shares produce a dividend yield sufficient to cover the RMD. If the RMD is 3%, you need a 3% yield. If the RMD is 5%, you need a 5% yield. If the RMD is 10%, you need a 10% yield. And so on.

So, let's think a bit about how the RMDs for an IRA inherited from a non-spouse work. I have one of those, got it when my father passed on. You look up your relevant age on Table I in the appendices to IRS Pub 590B. It gives you a life expectancy at your age, which is different from the life expectancy you would use if you were figuring it on your own IRA. My relevant age was 45, and the life expectancy was 38.8. So my first RMD was account balance as of December 31 divided by 38.8, or not quit 2.6%. Easily achievable with dividends.

But then instead of stepping down the table line by line, each year you reduce the initial life expectancy by 1. So 10 years later, I'm using 28.8 for my life expectancy, which is 3.5% RMD. Still not too bad, but it's beginning to accelerate. At age 60, 23.8 life expectancy means 4.2% RMD and I'd have to be very careful to have investments averaging that high a yield.

Bottom line, you eventually have to distribute all of that inherited IRA. Before that eventual year with life expectancy of 1 or less arrives, you will have years where you have to distribute more than any reasonable dividend yield. So you will need a plan to thoughtfully liquidate shares at times when you believe it's reasonable to sell shares. Or you just sell whenever you need to generate cash for a distribution, and live with whatever price the market gives you.

Or if you really like what you're invested in, you can take the distribution in kind and just transfer shares to your taxable brokerage account. You get a cost basis equal to the value on the date you take the distribution. Of course, if you do that you need to come up with cash from other sources to cover the income tax obligation created by the distribution.

If your RMD is generating a required distribution in the 2% to 3% range right now, you can follow the dividend strategy for a while. But it won't last, and you would be well advised to use the time when you can do that to think about what you want to do when this strategy is no longer feasible. Or if what you want to invest in already doesn't produce sufficient yield to cover the RMD, you need to think about it right now.
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Money is money. There is nothing special about money that comes from dividends vs. money that comes from selling stocks & bonds.
Just take out your RMD at the same time as you rebalance.

Michael Kitches has written a few articles on this subject.
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I would also suggest that you should be looking at your asset allocation across all of your accounts, not just in this particular account. That might allow you to invest more of this particular account in income generating investments so that you can use dividends from the account to fund the RMDs as long as possible, or at least until you hit 70 1/2 and have to start taking RMDs from all of your accounts, not just the inherited IRA.

A fine point that I didn't think about until after I retired is that the RMD on an IRA inherited from a non-spouse is independent of the RMD on IRAs in my own name. If my inherited IRA lasts until I hit 70 1/2, I will have my own RMD plus the RMD on the inherited IRA.

My tax crystal ball says it's better to have a plan to take reasonable amounts from the inherited IRA for income I need before age 70, and exhaust that account before RMDs start on my own IRA. If I didn't need distributions for living expenses at all, I'd consider taking them as in-kind distributions to my brokerage account so I'd be taxed at my lower rate now instead of the higher rate when RMDs start from my own IRA.

During my working career, my strategy was just to take the minimum, and transfer that to my brokerage account. That worked, and the size of my inherited IRA was/is such that the years between my retirement and age 70 1/2 are sufficient to gracefully avoid having an inherited IRA RMD at the same time as an RMD on my own IRA. Someone with a larger inherited IRA might have to plan more carefully than I did.
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What is the size of the IRA as compared to the remainder of your investments. If it is small then I believe you may be overthinking the situation. If the IRA is large I think there is a potential problem with hoping to take RMD from dividends. To do so you would need to select investments that would hopefully produce the dividends that would support your plan. I think this might be a detriment to your overall investments. I suggest that you invest and take RMD in a manner that is overall tax efficient and compatible with the rest of your investments including maintaining a desired asset allocation.
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Money is money. There is nothing special about money that comes from dividends vs. money that comes from selling stocks & bonds.

Yes, there is, actually. The odds are pretty good that dividends will continue, in spite of what the market is doing. It takes a really bad time, like 2008-09, for a lot of companies to cut dividends.
(And even then, it occurred in some industries than others.)

Just take out your RMD at the same time as you rebalance.
But, then you run the risk of having to sell at a low point.

Bill
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Why do you care if you need to sell a few shares to get the money? Because it's an IRA, there would be no capital gains to report if you sell a few shares. All taxes are paid on the RMD only.
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Why do you care if you need to sell a few shares to get the money? Because it's an IRA, there would be no capital gains to report if you sell a few shares. All taxes are paid on the RMD only.
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Well, the point is the cost and frustration of having to sell at a low price - regardless of taxes. If you're getting a decent dividend stream from your IRA, then you can sell fewer shares at a bad price, if you have to, to cover the current year RMD.

As Patzer explained very well, with an inherited IRA, you're using a different RMD table, and eventually you're going to use up that IRA, if you live long enough. In my case, I inherited an IRA from my father at age 63; I'm now 65. I won't want to draw it down too much by 70.5, when my own RMDs start, as he had mentioned. That would be too much per year. And my own RMDs will start at a lower rate, so I'm not so worried about that.

Bill
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2040target,

"Last year I used my RMD to fund our roth IRAs, I planned to do that again."

Please keep in mind that this statement, if taken literally, is a violation of IRS regulations.

RMD's cannot be directly placed into other retirement accounts. They must go to a taxable account.

Once they are in the taxable account, the money, cash only, can be used as a contribution to a retirement account as long as the contribution is covered by actual income.

Gene
All holdings and some statistics on my profile page
http://my.fool.com/profile/gdett2/info.aspx
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Please keep in mind that this statement, if taken literally, is a violation of IRS regulations.

RMD's cannot be directly placed into other retirement accounts. They must go to a taxable account.


Hmm...

In that case, I suppose I mean I took my RMD in cash as taxable income AND I fully funded both of our ROTH IRAs last year. Better?
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Please keep in mind that this statement, if taken literally, is a violation of IRS regulations.
RMD's cannot be directly placed into other retirement accounts. They must go to a taxable account.
========================
Hmm...
In that case, I suppose I mean I took my RMD in cash as taxable income AND I fully funded both of our ROTH IRAs last year. Better?

========================
Much. RMD amounts cannot be rolled over, and if the IRA custodian is on their toes, with proper procedures in place, they won't allow it.

Bill
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Does an RMD count as income to qualify for contributing to a Roth?
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Does an RMD count as income to qualify for contributing to a Roth?

No. It's investment income, not 'compensation'. You need to have 'compensation' to make contributions to either a Roth or Traditional IRA. You can get the definition of 'compensation' in IRS Pub-590A https://www.irs.gov/pub/irs-pdf/p590a.pdf

AJ
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No. It's investment income, not 'compensation'.

That's what I thought. So, the issue is not just the money flow, but the need for their to be other income in order to legitimize a Roth contribution.
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"Money is money. There is nothing special about money that comes from dividends vs. money that comes from selling stocks & bonds."

Yes, there is, actually.


No, actually there is not. Money is fungible. "Money has no smell." Take the check that your broker sent you to your bank, and ask the teller if she can tell if it came from a dividend or from selling a stock or bond.


"Just take out your RMD at the same time as you rebalance."
But, then you run the risk of having to sell at a low point.


No, no, no, no. A thousand times no. For heavens sake, read what Kitches et al. has written on this.

If stocks are down when it is time to rebalance, you will be selling BONDS and BUYING stocks.

This is not hard. Just trace out the money flow and ignore the handwaving.
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A tangent question --

I also own one of these inherited IRAs and take an annual RMD (I'm 55). If there is still money in this account when I die, my wife or my kids will inherit it. I assume they still need to take RMDs, right?

Lisa
in MA
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If stocks are down when it is time to rebalance, you will be selling BONDS and BUYING stocks.

Suppose I don't have any bonds?
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If there is still money in this account when I die, my wife or my kids will inherit it.

Why do you say 'or'? Have you designated beneficiaries for the account? If not, you should do that sooner rather than later. If you have, the designated beneficiary(ies) would be the one(s) to inherit, unless one is a contingency to the other.

I assume they still need to take RMDs, right?

Yes. Here's some information from the IRS on inherited IRA RMDs: https://www.irs.gov/retirement-plans/required-minimum-distri...

AJ
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If stocks are down when it is time to rebalance, you will be selling BONDS and BUYING stocks.

Suppose I don't have any bonds?

Then you won't be concerned about re-balancing at least from a stock to bond allocation.
A distribution for the RMD must be made and in my mind it is immaterial whether the cash coming out had been the stock value or a distribution.
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From a tax and share price basis and with the exception of trading costs, dividends are just like selling a share or partial share of stock.

With dividends the income is recognized at the company's convenience, with stock the income is recognized at your convenience.

In theory after a $1 dividend the stock is worth $1 less.
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If stocks are down when it is time to rebalance, you will be selling BONDS and BUYING stocks.
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Suppose I don't have any bonds?

--------------------------------
Then you will be glad to have gotten some dividends since the last required distribution.
Amazed that some people seem to be trying hard not to understand that concept.

Bill
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As Patzer explained very well, with an inherited IRA, you're using a different RMD table, and eventually you're going to use up that IRA, if you live long enough. In my case, I inherited an IRA from my father at age 63; I'm now 65. I won't want to draw it down too much by 70.5, when my own RMDs start, as he had mentioned. That would be too much per year. And my own RMDs will start at a lower rate, so I'm not so worried about that.

I'm aware of the issues. I have a beneficiary IRA from when my dad died in 2008. I was only 51 at the time. I also have a regular IRA. The big advantage of both is that there aren't any tax consequences (or paperwork) when trading in the accounts. So having cash available has never been an issue for me.

Well, the point is the cost and frustration of having to sell at a low price - regardless of taxes. If you're getting a decent dividend stream from your IRA, then you can sell fewer shares at a bad price, if you have to, to cover the current year RMD.

If having to sell at a low price is a concern, just set up a level at which you WOULD sell some shares. The other option is to look at something with a higher yield? Or have more variety of index funds, so you can sell those that are higher?

Any reason why you chose a mutual fund over an ETF (i.e. VTI instead of VTSAX)?
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Any reason why you chose a mutual fund over an ETF (i.e. VTI instead of VTSAX)?
I didn't. I'm using bond ETFs. Any reference to a Vanguard fund was somebody else.

Bill
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If there is still money in this account when I die, my wife or my kids will inherit it.
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Why do you say 'or'? Have you designated beneficiaries for the account? If not, you should do that sooner rather than later. If you have, the designated beneficiary(ies) would be the one(s) to inherit, unless one is a contingency to the other.

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I just read that to mean that either his wife OR his kids will inherit it, depending on whether his wife is still living at that point, that being the reason for uncertainty, not that he had left the situation up in the air.

Bill
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If there is still money in this account when I die, my wife or my kids will inherit it.
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Why do you say 'or'? Have you designated beneficiaries for the account? If not, you should do that sooner rather than later. If you have, the designated beneficiary(ies) would be the one(s) to inherit, unless one is a contingency to the other.
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I just read that to mean that either his wife OR his kids will inherit it, depending on whether his wife is still living at that point, that being the reason for uncertainty, not that he had left the situation up in the air.

Bill

----

That's right, Bill. And I didn't know if there might be a difference if my wife inherits it, or my kids. And I am a she -- you probably didn't actually see the original post.

Lisa
in MA
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Any reason why you chose a mutual fund over an ETF (i.e. VTI instead of VTSAX)?

If this one is for me, no real reason at all other than from what I gathered the differences between the two in a long term horizon were small. Any reason why I should choose ETFs over index funds?
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I just read that to mean that either his wife OR his kids will inherit it, depending on whether his wife is still living at that point, that being the reason for uncertainty, not that he had left the situation up in the air.

I don't like to assume, since there are some people that I know who haven't put beneficiaries on their IRAs/401(k)s even when they have been urged to do so. For some reason, people seem to think that it's okay to just let the IRA/401(k) just becomes part of their estate, rather than naming beneficiaries. But that's usually not the best way to transfer an IRA/401(k), since there may not be as much flexibility in taking RMDs, as well as potentially incurring additional probate costs. So I asked.

That's right, Bill.

So you have your wife as the primary beneficiary, and the kids as contingent beneficiaries?

And I didn't know if there might be a difference if my wife inherits it, or my kids.

Not really. A legal spouse can treat a deceased spouse's non-inherited IRA as their own, while non-spouse beneficiaries are not able to do so - those IRAs must become inherited IRAs. But since this is already an inherited IRA, it can't be changed back into a non-inherited IRA. As such, RMDs will need to continue.

AJ
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Different folks approach this differently. Myself, I have an allocation for my portfolio. My actual IRA investment are heavier in mutual funds that throw off cash. The 2018 RMD depends as you know on the value of your account on December 31, 2017. I go into my IRA and move all available cash into VMFXX to cover my RMD. Never enough - so I sell enough of something in early January to "fund" by RMD and put the cash in VMFXX.

The argument against my approach is you can miss the returns by selling early. True. But I also avoid selling more of my IRA than the RMD percentage.

Lets say my RMD divisor is 25.0 -- 4% of my year end value. Set the year end value at $100K

If the value of my IRA in 2018 goes up by 15% and say VMFXX earns nothing. Also say I take my RMD as late as possible 12/31/18. What is the difference vs leaving the funds in the higher returning portfolio? A total of $600.

Now lets say the portfolio goes down 15% - the amount of your RMD is still $4,000 - the end of year values for sell early vs sell late is again $600. But here selling early has the $600 advantage.
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Yes, there is a difference. If a spouse inherits, it is as if it was their own, i.e., any RMDs are based on being over 70. If any non-spouse inherits, then the RMDs start at any age and are based on the age of the inheritor.
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Yes, there is a difference. If a spouse inherits, it is as if it was their own, i.e., any RMDs are based on being over 70. If any non-spouse inherits, then the RMDs start at any age and are based on the age of the inheritor.

Not if it's already an inherited IRA that's being inherited again (this case). The successor beneficiaries all keep taking RMDs based on the original beneficiary's schedule.

AJ
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Yes, there is a difference. If a spouse inherits, it is as if it was their own, i.e., any RMDs are based on being over 70. If any non-spouse inherits, then the RMDs start at any age and are based on the age of the inheritor.

This is true for your own IRA, not for an inherited IRA which requires RMDs upon inheritance. The OP's question was WRT an inherited IRA.

IP
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tamhas: "Yes, there is a difference. If a spouse inherits, it is as if it was their own, i.e., any RMDs are based on being over 70. If any non-spouse inherits, then the RMDs start at any age and are based on the age of the inheritor."


What you wrote may be accurate if IRA was that of the deceased spouse, but in the instant case the OP is writing about IRA that was already inherited from a non-spouse. I do not believe that what tamhas wrote is accurate with respect to an IRA that was already an inherited IRA from a non-spouse.

Regards, JAFO
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<<So you have your wife as the primary beneficiary, and the kids as contingent beneficiaries?>>


Yes, AJ. This is how it is set up. Thanks, Lisa
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If the withdrawal you take from the IRA is required to support your household income need and this amount exceeds the RMD, then you in effect have no RMD as you are already withdrawing an amount in excess of it. So whether that amount is made up of only dividends (unlikely) or the sale of shares really doesn't matter.

But as the non-spouse beneficiary, it is unlikely you'll require the income to live on. Rather, you'll take the RMD each year and invest it...or you may withdraw the minimum and consume some or all of it. If so, the dividends this produces is really a side show. I suggest that you transfer, in-kind, the number of shares of a stock or fund that pays qualified dividends that will equal the amount of the RMD, and do so early in the year. This way, the dividends it pays will be taxed to you at the 0% or 15% rate for Fed income tax, rather than the 22% or higher rate if you left the shares in the IRA and eventually withdrew the qualified dividends the shares produce.

The other issue with the RMD is taxes. If the RMD is small relative to your household income, you can probably just absorb the slight tax increase. If it is large relative to household income, then you'll probably have to sell some shares to generate sufficient cash to either pay in quarterly estimated tax payments or to send to the IRS the next year at tax time.

BruceM
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I suggest that you transfer, in-kind, the number of shares of a stock or fund that pays qualified dividends that will equal the amount of the RMD, and do so early in the year. This way, the dividends it pays will be taxed to you at the 0% or 15% rate for Fed income tax, rather than the 22% or higher rate if you left the shares in the IRA and eventually withdrew the qualified dividends the shares produce.

I have probably misinterpreted what you wrote and I may be confused. If you transfer stocks out of the IRA you would be taxed at that time at ordinary income rates. Subsequent to that event any dividends would be taxed at a reduced rate but you haven't eliminated or lowered any taxes.
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The withdrawal from a traditional IRA is taxed the same whether it’s a withdrawal of cash or an in-kind withdrawal of securities.

Key advantages of taking a mandatory withdrawal early are:

1) any qualified dividends generated by that investment after the withdrawal may be taxed at a lower rate than if they’re received inside the IRA and then taxed as ordinary income in a subsequent withdrawal.

2) the holding period for long term capital gains tax treatment of any in-kind withdrawal starts that much sooner when you take the withdrawal earlier in the year.

3) the withdrawal amount is typically based on the IRA value as of 12/31 of the previous year. The closer to that date you take the withdrawal, the less likely there will be any major swings in market value of the IRA between calculation date and withdrawal date. If the IRA value collapses between the calculation date and the withdrawal date, you’d be forced to take out a larger percentage of the IRA’s value than you otherwise would have, reducing the benefit of deferrals.

Regards,
-Chuck
Discovery/HR Home Fool
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3) the withdrawal amount is typically based on the IRA value as of 12/31 of the previous year. The closer to that date you take the withdrawal, the less likely there will be any major swings in market value of the IRA between calculation date and withdrawal date. If the IRA value collapses between the calculation date and the withdrawal date, you’d be forced to take out a larger percentage of the IRA’s value than you otherwise would have, reducing the benefit of deferrals.

Of course, for the large percentage of years where there is a positive total return, you've lost the ability to defer taxes on the growth that would have occurred.

Additionally, if you do a withdrawal near the end of the year, and have enough of it withheld to meet your tax safe harbor, you don't have to send the government any estimated taxes throughout the year, nor do you have to worry about underpayment penalties. If the only withdrawal that's done is at the beginning of the year, you won't be able to do that.

Lots of things to consider - and it all depends on the specific investor's situation and preferences.

AJ
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Hi AJ:

Of course, for the large percentage of years where there is a positive total return, you've lost the ability to defer taxes on the growth that would have occurred.

From the context of the thread, I thought we were discussing money that is withdrawn and didn't need to be spent. Hold the investment for at least a year and a day after the withdrawal, and it becomes a long term holding, with lower capital gains tax rates than ordinary income tax rates. Hold it longer, and the tax is deferred even longer. Unlike the Traditional IRA with its mandatory distributions, I'm not aware of any general obligation to sell an after tax position and take a gain in it just for the sake of triggering a taxable event.

Additionally, if you do a withdrawal near the end of the year, and have enough of it withheld to meet your tax safe harbor, you don't have to send the government any estimated taxes throughout the year, nor do you have to worry about underpayment penalties. If the only withdrawal that's done is at the beginning of the year, you won't be able to do that.

I'm a bit confused on this one. I thought that if you have taxes withheld from a distribution, it's considered timely no matter when in the year you take the withdrawal and have the taxes withheld. If what you're really saying is that if you wait until the end of the year, you will have a better picture of your total income and tax burden than if you take the withdrawal early in the year and thus can better target the amount of your withholding, I agree with you.

Regards,
-Chuck
Discovery/HR Home Fool
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From the context of the thread, I thought we were discussing money that is withdrawn and didn't need to be spent.

Yes, but you were also talking about dividends. You can't defer taxes on dividends or interest that is paid outside of a tax advantaged account. I get that some dividends (definitely not all - most REITs, some preferreds, etc.) are qualified, so it's a lower rate. But even then, and especially for non-qualified dividends and interest, you are definitely missing out on the deferral that would have occurred had those dividends stayed in the tax advantaged account another 5 or 10 years.

Hold the investment for at least a year and a day after the withdrawal, and it becomes a long term holding, with lower capital gains tax rates than ordinary income tax rates. Hold it longer, and the tax is deferred even longer.

It's not always your choice to hold it at least a year and a day after it's been distributed. I've learned that the hard way by having several stocks called and/or bought out short of holding a year. And even if it is your choice, sometimes holding a specific stock until it's a long term holding would probably just result in a loss, because something has changed since you purchased it, or even since it was distributed from your tax advantaged account, so you are better off selling to protect a short term gain, rather than suffer a long term loss.

Unlike the Traditional IRA with its mandatory distributions, I'm not aware of any general obligation to sell an after tax position and take a gain in it just for the sake of triggering a taxable event.

Leveraged buyouts, mergers/acquisitions, and calls can all trigger a taxable event. And with M&A activity on the uptrend, it's probably going to be happening more than it used to. https://www2.deloitte.com/us/en/pages/mergers-and-acquisitio...

I'm a bit confused on this one. I thought that if you have taxes withheld from a distribution, it's considered timely no matter when in the year you take the withdrawal and have the taxes withheld. If what you're really saying is that if you wait until the end of the year, you will have a better picture of your total income and tax burden than if you take the withdrawal early in the year and thus can better target the amount of your withholding, I agree with you.

Yes, the point about withholding being considered timely no matter when during the year it's done is precisely what you can take advantage of. Combined with the fact that you should pretty much know at least one of your safe harbor amounts to avoid underpayment penalties as soon as you file your taxes for the prior year (100% or 110% of your prior year's tax liability, depending on your income), you can keep the money for the current year's taxes in your hands longer, rather than sending it to the government, without incurring penalties.

Even if you pay no other Federal income taxes during the year (no estimated tax payments and no other withholdings from paychecks, other tax advantaged account withdrawals, pensions, SS, etc.) and then make an IRA or 401(k) withdrawal the last week of the year and have at least your safe harbor tax amount withheld from the withdrawal, the IRS will count it as if it was paid throughout the year. You will avoid the penalties for underpayment - while you had control of the money, and were getting investment returns on it, for 51 weeks out of the year.

AJ
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Hi AJ --

Fair point on the mandatory corporate reorganizations being a case where a sale can be forced. In my experience with a portfolio that's in the neighborhood of 50 or so stocks, I see in around one or two 'events' in a typical year, of which maybe a third to a half are mandatory taxable in nature. You're right that could very well increase in the future, particularly now that the disincentives against corporate US domestic investments have been lessened.

I've come to accept that there are trade offs in investing accounts. Traditional retirement accounts are great for accumulation years but lousy when it comes to mid-career flexibility and can be problematic choices late in distribution years and in inheritance situations. Roth retirement accounts are great for distribution years and inheritance situations and have better flexibility, but can be trickier and far more expensive on a tax-equivalent basis for mid- and late-career professionals to fund than traditional retirement accounts. Standard investing accounts have the best flexibility, but you have to be mindful of the more immediate tax consequences of actions.

Having over-saved in traditional retirement accounts relative to the other types, I've faced a few cases where I've lost opportunities or had to take a very convoluted (and expensive) route to get at cash when I've needed it. I've come to see the 'less immediately tax efficient' nature of taxable investment accounts as acceptable places for some of our money, valuing the flexibility over the near-term tax efficiency of traditional retirement accounts. I still try to be tax-smart within those taxable accounts, but I've also made active choices to fund after-tax accounts instead of traditional retirement accounts to try to get a better balance of asset location and build better flexibility than I had in the past.

I'm all for tax efficiency, but I learned the hard way that it's sometimes better to pay a little tax now to avoid a bigger set of total costs (including taxes) later.

Regards,
-Chuck
Discovery/HR Home Fool
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Having over-saved in traditional retirement accounts relative to the other types
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I'm all for tax efficiency, but I learned the hard way that it's sometimes better to pay a little tax now to avoid a bigger set of total costs (including taxes) later.


I would urge you to take advantage of the new, temporarily (at least per current law) lower rates to do conversions of your traditional accounts to Roth accounts. You have through 2025, and assuming most of the contributions were made at a 25% or greater rate, will be paying at least 1% less than you saved at the time you made the contribution.

AJ
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>i> the IRA value as of 12/31 of the previous year. The closer to that date you take the withdrawal, the less likely there will be any major swings in market value of the IRA between calculation date and withdrawal date. If the IRA value collapses between the calculation date and the withdrawal date, you’d be forced to take out a larger percentage of the IRA’s value than you otherwise would have,

Indeed. This is the primary reason for taking it early.

A while ago (in Jan 2018) I ran a backtest comparison, taking the RMD early in the year vs. late. Summary:
"... it doesn't much matter when in the year you make the withdrawal. {For a $1,000,000 portfolio, deferring the RMD to December vs. January) $13,000 less on the single worst bad year, $6,000 more on the typical good year. Good years outnumber bad years 51 to 14.
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and one more for early withdrawal - easier on beneficiaries in the year you die.
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the IRA value as of 12/31 of the previous year. The closer to that date you take the withdrawal, the less likely there will be any major swings in market value of the IRA between calculation date and withdrawal date. If the IRA value collapses between the calculation date and the withdrawal date, you’d be forced to take out a larger percentage of the IRA’s value than you otherwise would have,

Indeed. This is the primary reason for taking it early.


I agree! I make my RMD withdrawal on the first business day after the New Year's Holiday. I don't have any taxes withheld from the distribution. It's transferred directly to my taxable investment account. Nor do I have taxes withheld from Social Security or pensions.

I prefer to calculate my annual AGI and make quarterly tax payments using the Electronic Federal Tax Payments System (EFTPS) and California's WebPay system. Both guarantee that your taxes will be paid in a timely manner.
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I don't have any taxes withheld from the distribution. Nor do I have taxes withheld from Social Security or pensions.

I prefer to calculate my annual AGI and make quarterly tax payments using the Electronic Federal Tax Payments System (EFTPS) ...


Or, y'know, just do a mid-December IRA withdrawal for the approximate amount of what your tax will be, or the safe-harbor amount, and have 100% withheld. I've been doing that for the last few years and it's worked out fine.

Now I'm starting to think that maybe I'll stop the withholding from our monthly pension and let that IRA withdrawal be our entire withholding. The first few years after I retired I tried to juggle the withholdings to be close to the taxes owed, but it was always wildly off and a real PITA. Either it would be way too low and I'd have to write a big check, or way too low and I'd get a big refund.
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Or, y'know, just do a mid-December IRA withdrawal for the approximate amount of what your tax will be, or the safe-harbor amount, and have 100% withheld

Yes, I much prefer this method, and I too have had no problems with the IRS and withholdings...just make sure to include the withdrawal (and immediately 100% sent to the IRS) in your tax calc for the year. The other thing I've learned is not to wait too late in December to do this....the IRA custodians tend to be busy that time of the year.

The reason this works is the IRS considers 3rd party withholdings to have been withheld evenly over the year, to include SS, Pension, Life Annuity, TIRA or employment withholdings. But of these, the TIRA is the only one I can fully control when the withholding is taken.

And if you start doing this early in retirement it will reduce the size of the future RMD. Yes, the household is giving up tax deferred growth earlier on part of savings, and although I haven't done any calculations to show it, I'd reason that the much more favorable Qualified Dividend and LTCG tax treatment in a taxable account negates some, if not all, of the benefit of tax deferred growth.

BruceM
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Or, y'know, just do a mid-December IRA withdrawal for the approximate amount of what your tax will be, or the safe-harbor amount, and have 100% withheld.

I prefer "parking" the RMD in my taxable investment account at the beginning of the year and temporarily invest it in an investment that generates non-taxable income while I decide whether to spend a portion of it and decide which securities I should invest in.

Now I'm starting to think that maybe I'll stop the withholding from our monthly pension and let that IRA withdrawal be our entire withholding. The first few years after I retired I tried to juggle the withholdings to be close to the taxes owed, but it was always wildly off and a real PITA. Either it would be way too low and I'd have to write a big check, or way too low and I'd get a big refund.

I mucked about with having taxes withheld from Social Security, pensions, and RMD initially and discovered it to be a highly unpredictable way for paying taxes: you either had too much or too little taken our for the IRS, for the California FTB, or both. I too hated writing big checks to submit with my tax returns.

I switched to making estimated payments to the IRS and California FTB. So far no underpayment of taxes to either and only a few hundred dollars of overpayment that I apply to the first quarters estimated tax payments. So between 01 and 15 April; I complete last year's tax returns, schedule my quarterly payments to the IRS and California FTB and forget about taxes until next year.
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The closer to that date you take the withdrawal, the less likely there will be any major swings in market value of the IRA between calculation date and withdrawal date. If the IRA value collapses between the calculation date and the withdrawal date, you’d be forced to take out a larger percentage of the IRA’s value than you otherwise would have,

Indeed. This is the primary reason for taking it early.


It looks like it would be more accurate to say "If the fund's value within the IRA collapses," since you don't HAVE to hold your RMD in something volatile. One alternative choice is to put the RMD amount in something like cash and take it when you choose. If you WANT the money early, it doesn't matter.
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It looks like it would be more accurate to say "If the fund's value within the IRA collapses," since you don't HAVE to hold your RMD in something volatile. One alternative choice is to put the RMD amount in something like cash and take it when you choose.

Yes.

But that wasn't what I looked at. What I looked at was maintaining the investments inside the IRA until the time you made the withdrawal. Which, I think, is the way most people would do it. The moment you convert your RMD to cash, it no longer participates in the growth of the investments, and hence it doesn't matter when you withdraw it.
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