RMDs

Retirement Retired Fools
#10

like having to sell every year to fund your RMD…

as mentioned, the IRS has no requirement the RMD be in cash, only that a dollar figure is transferred out of the TIRA by the end of the year. In-kind transfers to meet the RMD are pretty common.

However, there are a couple of situations in which you’ll need cash for your RMD. If you wish to pay the tax withholding out of the TIRA and you don’t have sufficient cash for the custodian to send to the IRS, you will have to sell something, as I don’t think the IRS would see the humor in transferring, in-kind, 20 shares of PM to them. Another RMD strategy requiring cash will be Qualified Charitable Distributions. We’ve done a boat-load of these this year, but had sufficient cash to cover them. Next year, proving none of my investments are involuntarily liquidated, will likely require me to sell some holdings to generate the cash to contribute to our charities.

BruceM

1 Like
#11

…like having to sell every year to fund your RMD…

I’m puzzled about the aversion to selling assets to withdraw RMD/QCD from a tax-deferred IRA. It seems strange to me to keep several $100K in cash earning .01% interest in my IRA just to avoid selling securities to satisfy my RMS/QCD withdrawals. The capital gains on the securities sold are enough to cover the withdrawals.

2 Likes
#12

MCCrockett

I’m puzzled about the aversion to selling assets to withdraw RMD/QCD from a tax-deferred IRA. It seems strange to me to keep several $100K in cash earning .01% interest in my IRA just to avoid selling securities

$100K in cash is too much, but having a buffer amount to keep you from being forced to sell when covering RMD $'s.

i.e. If you know your RMD next year is going to be ~~$5,000 or so, have a little more than that lying idle. You won’t be pushed to getting that cash when your stocks are being stressed in the market.

1 Like
#13

“…like having to sell every year to fund your RMD…”

You’re probably going to have to sell every year.

Since your time horizon for selling is way short of the 10 year typical outlook for the stock market -

You probably DON"T want to be all in stocks in your IRA.

My IRA declined 1.5% since Jan 1. 3% cash, rest in REITS, bonds, stock funds. 50/50. REITS have gone up.

Since I have to take 4.4% or so this year, my dividends/interest cover about half of that. Just have to sell a few percent to fund it for the year.

Most folks in 70s only have to either have a few percent interest/dividends, or sell a few percent of their assets.

Yeah, being in ‘all stocks’ in a down market probably not fun!

t.

1 Like
#14

BrerBear

$100K in cash is too much, but having a buffer amount to keep you from being forced to sell when covering RMD $'s.

i.e. If you know your RMD next year is going to be ~~$5,000 or so, have a little more than that lying idle. You won’t be pushed to getting that cash when your stocks are being stressed in the market.

I don’t know exactly what next year’s RMD until the end of December. If today were 31 December, my next year’s RMD would be $130K even with the market behavior since the beginning of the year.

The only difference between selling securities in an “up” year versus a “down” year is the reduction in your capital gains on your sales. The IRS’ Uniform Lifetime Table guarantees that you will need to sell securities in a “down” year at some point in your lifetime. Why worry about it?

2 Likes
#15

"I don’t know exactly what next year’s RMD until the end of December. If today were 31 December, my next year’s RMD would be $130K even with the market behavior since the beginning of the year.

The only difference between selling securities in an “up” year versus a “down” year is the reduction in your capital gains on your sales. The IRS’ Uniform Lifetime Table guarantees that you will need to sell securities in a “down” year at some point in your lifetime. Why worry about it?"

Well, you’re in a nice spot to be having to take $130K/yr out of your IRA. Either than, or are 90 years old and got millions in the IRA, too.

The problem is not selling ‘securities’. It is having something other than STOCKS to sell each and every year.

Now, if you are in your 70s, dividends (typically 2.3% now on SP500 type funds) will provide up to half your annual needs. So you only have to sell maybe 1.5% of your holdings.

There is no capital gains on your IRA holdings. It’s all ‘full income’.

Unless you take out securities and transfer them to a separate taxable account - and still paying any and all taxes on the value of the stocks at the time of transfer - most folks are simply going to ‘sell’ something to get the 130K after they have their dividends and interests.

Not much reason to go to that trouble. If stock XXX is at 88 dollars a share - and you transfer them to a taxable account, paying your full income tax on 88 dollars time number of shares…you could simply sell them in your IRA…take the cash…and buy the stocks at 88/sh in your private account - IF you really want those stocks. When you go to sell them, the tax basis will be 88/sh anyway.

Being all in stocks could lead to a situation where the market is really up on Dec 31, and crashes big time 3 days later and stays down.

Think that happened to lots of dot.com type stocks. The capital gains rate was going from 20% to 15% the next tax year - so folks held off till Jan 2 and then dumped tons of stocks…around year 2000? QCOM went from $800/sh to $250/sh in a week.

I sleep well at night. Dividends and interest piles up. I"m 50/50 in my IRA. If stocks are down, sell some REITS or corp bonds for the extra 2% I need a year.

t.

3 Likes
#16

Ok…I think I’m about to become public enemy #1 on this thread. Please, no one take this personally…p-l-e-a-s-e…

Read this line over and over and over and over and over…

YOU ARE NOT REQUIRED TO SELL ANYTHING TO MEET YOUR RMD REQUIREMENT

For the life of me I cannot figure out why this is so difficult to understand.

If you have an asset allocation for your investments (taxable and tax deferred accounts) of, say,

40% Large cap value ETF (VONV)
20% short duration bond ETF (SLQD)
15% REIT ETF (VNQ)
10% International (VEA)
10% Small Cap Growth ((IWM)
5% Cash

If, say, your RMD has the dollar value of 20% of VNQ and IWM held in your TIRA, then transfer the appropriate number of shares of these two ETFs to your taxable account. Your RMD requirement has been met, your asset allocation has been maintained and this will have NOTHING TO DO and is totally separate from any household cash flow need you may or may not have from your retirement plan(s) that you generate when you rebalance your allocation. RMDs and cash generation have nothing to do with each other…keep them separate.

Ok…let the flaming begin…

BruceM.

15 Likes
#17

On the contrary… thanks for this. I did not know this.
Also, for anyone else who did not know: a) this resets the cost basis to the value on the date of the transfer, and b) it also resets the “purchase date” such that even if you held the position in your IRA for 20 years, once it arrives in your taxable account, it’s as if it was a new purchase. If you sell w/in a year, it’s a short-term gain (or loss.)

2 Likes
#18

RMDs and cash generation have nothing to do with each other.

OK, but you still must come up with the cash to pay income taxes on the value of the shares transferred. And often have to pay estimated taxes on it at end of the quarter.

1 Like
#19

I kind of follow.

But regardless of the exact how/why path taken to fulfill RMD, you are required to ‘deplete’ your tax deferred assets by the amount of the RMD. Unless I’m still adrift in the fog.

(Always a possibility.)

(Mine are taken from a annuity cash account that is tied to market results. So far, so good.)

#20

“But regardless of the exact how/why path taken to fulfill RMD, you are required to ‘deplete’ your tax deferred assets by the amount of the RMD. Unless I’m still adrift in the fog.”

Yes, you can ‘transfer’ (if allowed by your IRA custodian), shares in your IRA to your taxable accounts.

However, you MUST pay income taxes (regular rate) on the value of the shares moved.

Let’s say you need to take $40,000 out of your million dollar IRA portfolio. (RMD 4%). You will pay regular income taxes on that $40,000. No matter what.

Whether you transfer ‘shares’ or sell the shares in the IRA and transfer ‘cash’ to your checking account.

Makes no real difference if you sell the shares in your IRA…then buy those shares in your taxable account IF you want to keep that. Of course, there is a ‘transaction fee’ but it probably won’t be any more/less than the ‘transfer fee’ of shares which your custodian might do by selling in one account and buying in the other.

The tax basis for your shares in your taxable account is now $40,000 when you go to sell it some time in the future no matter how they get there.

The only way to reduce ‘taxes’ on your RMD is to donate to charity a part or all of your RMD during the year. Let us say you normally give charity X $10,000 a year. You can do that by donating directly from your IRA to that charity. Then, if you had a $40,000 RMD requirement, you get $30,00 moved to your checking or brokerage account…and owe income taxes only on $30,000. (But you don’t get to write off again a $10,000 charitable donation on your income taxes at year end)

t.

2 Likes
#21

No this is a good point Bruce. No flames needed. Have a rec.

#22

T. It’s called a Qualified Charitable Distribution. But there are some rules that must be followed

  • the IRA owner must have attained at least age age 70.5

  • Max contribution is $100k per year

  • If the IRA owner has an RMD, the QCD will come first from the RMD

  • The QCD check from the IRA must be payable to the charity, not the IRA owner, although the check made payable to the charity may be sent to the IRA owner to then forward to the charity.

Most retirees take the standard deduction today. Because the QCD is not included in income, the QCD is the tax equivalent of making a deductible charitable contribution.

I attained age 70.5 this year. We saved up all our regular charitable donations and then made them through the QCD. Worked great!

BruceM

1 Like
#23

“Most retirees take the standard deduction today. Because the QCD is not included in income, the QCD is the tax equivalent of making a deductible charitable contribution.”

If you do a QCD from your IRA, you can benefit a lot more than a ‘simple charitable donation’.

As you noted, most retirees take the standard deduction - unless they live in high tax states like MD or NY where real estate taxes are over $10K…and you run into the SALT limitation of only 10,000 deduction for state, local and sales taxes. Even then, you might come up with a total of $15,000…or not. So making say a $5,000 or $10,000 donation from regular income might get you over.

For those with low taxes, a $5,000 or $10,000 donation won’t even reach the $15,000 standard deduction (good to 2026 and then? drop to what? )

So… if you take your QCD from your IRA, it comes off the top. No income tax on it.

IRA RMDS are taxed at full income rate.

If you have a lot of dividend income, it’s taxed at only 15% (or less).

But RMDs ate likely going to be taxed at highest marginal rates you pay. IF you move into the 20% bracket…well, that’s what you pay.

So…unless you are WAY over your %15,000 in standard deductions, you benefit from doing the QCD from the IRA RMD rather from taxable account income.

I’d rather pay taxes on dividends and cap gains rates…and some regular income…

I haven’t exceeded the ‘standard deduction’ in years and years since they raised it. Giving money from taxable accounts would be half wasted since part of it is just reaching the $15,000 deduction…

Unless you already exceed your standard deduction limits…(without the charitable donation) it makes no sense NOT to do your charitable donations from your IRA RMD. You come out ahead tax wise.

t

#24

OK, but you still must come up with the cash to pay income taxes on the value of the shares transferred. And often have to pay estimated taxes on it at end of the quarter

Yes, as well as other cash flow needs as I outlined above.

With professional financial planning, cash flow (or liquidity) requirements are combined for the time period being planned (usually the calendar year), so that a single portfolio rebalance will meet them, usually along with a safety % at the margin. Tax due on any event, to include tax on RMDs, is one of the household cash flow needs. Trying to do this piecemeal can get quite convoluted and tough to follow.

BruceM

#25

Last year we had a relatively low tax rate, so I got frisky and took an extra 70K out of an IRA. Figured to take adavantage of the situation. (The RMD goes up every year, remember?) That was enough to bump us up a notch or two. So this year we are in a higher bracket than I wanted.

Poop. Some years you can’t win for losing.

CNC

#26

Last year we had a relatively low tax rate, so I got frisky and took an extra 70K out of an IRA. Figured to take adavantage of the situation. (The RMD goes up every year, remember?) That was enough to bump us up a notch or two. So this year we are in a higher bracket than I wanted.

Poop. Some years you can’t win for losing.

CNC

This self inflicted wound could be pretty easily avoided with a few simple calculations to determine the tax impact of the proposed withdrawal amount. Especially near year end when any variability in income becomes less of a factor.

#27

Last year we had a relatively low tax rate, so I got frisky and took an extra 70K out of an IRA. Figured to take adavantage of the situation. (The RMD goes up every year, remember?) That was enough to bump us up a notch or two. So this year we are in a higher bracket than I wanted.

Poop. Some years you can’t win for losing.

As BHM pointed out, the higher bracket was likely avoidable. When considering realizing more income, I run the two sets of numbers via this website, which admittedly has limitations as well like not taking IRMAA or NIIT into consideration, but gives me a quick heads up of what my taxes should look like. I track income on a spreadsheet all year long, and realize the extra income the last days of the year. Not late enough last year, when we got hit with a huge capital gains distribution from one of our mutual funds on 12/31, while I did our Roth Conversion on 12/30, but there was buffer in my calcs treating all dividends as ordinary income, so it didn’t wind up hurting us tax wise.

https://engaging-data.com/tax-brackets/

Whoever first linked this website to TMF, THANK YOU. It has become our go to tool.

IP

2 Likes
#28

Not late enough last year, when we got hit with a huge capital gains distribution from one of our mutual funds on 12/31

I just submitted an article for a retiree newspaper circulated in Vancouver, WA on this topic.

Unrealized gains that became realized gains, it seems, is a problem for several popular managed (as opposed to index) mutual funds in 2021. In a taxable account, this can become an unpleasant surprise, particularly for those who just recently bought shares of the fund realizing these gains. Searching through Morningstar’s fund screener, I found popular funds like American funds Portfolio Growth (GWPFX) at 38% and Vanguard Prime Cap (VPMCX) at 63% Potential Capital Gains Exposures. This creates a real tax risk for those buying into these funds at this high level of unrealized gains.

I’ve long ago discontinued holding managed mutual funds and hold either ETFs or primarily, individual shares of company stock. This gives me better control over distribution projections thus the ability to project tax liability and withholdings. I’ve constructed an Excel SS that breaks income down into ordinary income, Qualified Dividends + LTCG and non-taxed income, and from this, the ability to project Fed tax pretty closely. This has historically allowed me to tailor Roth conversion amounts while staying in the tax bracket. But this is my first RMD year, so looks like Roth converting is over. Its a tax pain-in-the-butt when your TIRA has done so well over the years.

BruceM

1 Like
#29

"This self inflicted wound could be pretty easily avoided with a few simple calculations to determine the tax impact of the proposed withdrawal amount. Especially near year end when any variability in income becomes less of a factor. "

Ah, but that requires patience - cuz of late in year distributions from funds.

Howie52
We are considering pulling funds out of an IRA to restore an emergency fund somewhat depleted by
a couple “emergencies” which hit us last year. But we still have to see what happens through the
summer, fall and onward from there.

1 Like