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For Those With Tiras, Be Mindful Of The RMD

Bozo
  |     |   1,375 posts since 2011

For those readers turning 70 1/2 this year, with Traditional IRAs (TIRAs), don't forget your first RMD is due this calendar year, unless you elect to defer to 2018 and withdraw both 2017 and 2018 in 2018. My back-of-the-envelope suggests a deferral could have adverse tax consequences.

So, assuming you plan to withdraw your 2017 RMD in 2017, be aware that some financial institutions require "paperwork" (e.g., Schwab), and that it's not necessarily like Vanguard, where you can just pick up the phone and order an RMD.

In addition, if you plan to satisfy your total TIRA RMD from one IRA account (as did I), make sure you won't get socked with an EWP. Some IRA CDs permit RMDs from IRA CDs with no EWP, but only "to the extent of" your RMD on that particular institution's IRA CD. Amounts in excess may be hit with a nasty EWP.

Bottom line: don't wait until the last minute to order that RMD. If you have questions, pick up the phone.

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Bozo
  |     |   1,375 posts since 2011
Example: Joe has a $100,000 IRA CD with XYZ financial institution. Joe's total TIRAs are in the amount of $1,600,000 at end-of-year 2016. Joe's RMD for 2017 is 3.65% X $1,600,000, or $58,400.
Joe wants to satisfy his total RMD from his IRA CD at XYZ. XYZ's terms and conditions waive the EWP for early distributions for RMDs. Joe assumes this means any distribution for any RMD. Joe submits his RMD request for $58,400, only to be advised that the EWP is waived only to the extent of 3.65% X $100,000. The excess ($54,750) is subject to EWP. Since Joe waited until the week before Christmas to submit his request, Joe might be in a tough spot. He could cancel the transaction, and bunch the RMDs into 2018 (which might throw him into a higher marginal tax bracket and IRMAA), or he could bite the bullet and pay the EWP. Neither is palatable.
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jib2424
  |     |   34 posts since 2014
In what cases would it make sense to take both the 2017 and 2018 distributions in 2018?
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Bozo
  |     |   1,375 posts since 2011
jib2424, re your query above, it might make sense if the person is confident his or her marginal tax brackets in 2018 (even with the double RMD) will be lower than his marginal brackets in 2017.

Example: Jim is a (very) highly-compensated individual, a CA resident, and is currently in the 39.6 Federal and 13% (CA) marginal tax brackets. Jim is retiring December 31, 2017. His only taxable income going forward in 2018 will be his Social Security and his RMDs. Jim's TIRA balance EOY 2017 is projected to be $1,600,000 (FYI, Jim has a potload of Roths from that conversion opportunity to which Kaight refers). Even taking two RMDs in 2018, and adding his Social Security, Jim will be well below his current marginal tax brackets. If Jim took his 2017 RMD in 2017, it would be taxed at the higher marginal rates.
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Kaight
  |     |   1,192 posts since 2011
Went Roth many years ago when the IRS offered their one-time "tax spreading" deal. You did not have to declare the conversion all in one year. They gave you four years over which to spread it, which was a help.

No regrets so far.
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Bozo
  |     |   1,375 posts since 2011
Kaight, glad it worked for you (the Roth conversion). I did the math at the time, and the tax bite would have been horrendous. I passed.
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Kaight
  |     |   1,192 posts since 2011
Understood, Bozo; and understandable. My own situation was perhaps somewhat different. I had already retired by the time that "spread" deal showed up from the IRS. Because I did not work many years, my IRA was relatively small, and divided by four, smaller still. So for me the deal worked out quite well.

I'm happy now not having to concern myself with all the annoying withdrawal rules and considerations. I have neither desire nor intent to cash in my IRA any time soon. It continues to grow tax free, as it has for many years.
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Kaight
  |     |   1,192 posts since 2011
I apologize that, in this post, I am unable to offer you a clickable link. Ken removed ability of posters here to offer clickable links at the same time he withdrew our ability to edit posts. You will have to copy the link and paste it into your browser. I regret this situation and I am sorry for the annoyance and inconvenience this causes..

I happened to run across this Kiplinger item from years ago:

https://www.kiplinger.com/article/retirement/T046-C000-S002-7-myths-about-roth-ira-conversions.html

and it got me to thinking (always a dangerous situation). But what if TIRA owners used their RMD money to pay the tax on Roth conversion of a portion of their remaining TIRA? Eventually you will have Roth converted the entire amount.

What do you think, Bozo. Is this a good idea or am I full of prunes?
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Bozo
  |     |   1,375 posts since 2011
Kaight, it's certainly worth considering. One concern I have: I read somewhere there's a five-year holding period on Roths before you can tap converted funds. Maybe I'm the one full of prunes.
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Kaight
  |     |   1,192 posts since 2011
Thanks, Bozo. It might be different, it likely IS different, for persons who must rely on their IRA money to live. But for others, myself included, I can tell you my Roth IRA funds will be the VERY LAST of my money that I ever would spend. So far I've not spent a dime of those funds. Why would I, when that pot of money is legally permitted to expand tax free, while the growth of my remaining nest egg is taxed mercilessly.
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Bozo
  |     |   1,375 posts since 2011
Kaight, too funny. Having just withheld 25% federal and 10% state from my 2017 RMD at Schwab, I can empathize. Mind you, this is being in lower marginal brackets in retirement! My oft-stated joke with the wife: saving money for retirement is easy. Managing it in retirement is the hard part.
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Kaight
  |     |   1,192 posts since 2011
Yes, well that CA taxation is brutal. I located the following writing in a reference online:

"Roth IRAs are a special type of IRA that generally offer tax-free withdrawals. As long as you keep your money in a Roth for at least five years after you open it and take your distributions after the age of 59-1/2, most Roth distributions are tax- and penalty-free. This applies to both federal and California taxes."
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Bozo
  |     |   1,375 posts since 2011
Kaight, more trivia on RMDs. One little-known factoid is that the RMD on TIRAs is actually less than the "4% rule" until one hits the age of 73. At that age, it nudges up to about 4.04%. Long ago, I decided to abandon the "4% rule" (if it ever was a rule) in favor of just taking the RMD, spending same as necessary, and banking the rest.

I must admit it hurts to see a balance go down because of a RMD withdrawal. I know, I know, it's just the payment of tax long deferred.
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Bozo
  |     |   1,375 posts since 2011
Kaight, the open question is "banking the rest". Example: I took a Required Minimum Distribution from Schwab in the amount of "x". After federal and state withholding, I have "x-y". So, what do I now do with "x-y"? It is now, by definition, after-tax.

I'm plopping it into my Alliant savings account until I can figure out what to do with it. My wife was too funny. As she noted, you have a problem most might envy, i.e., where to plop excess cash.
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Kaight
  |     |   1,192 posts since 2011
Well, again, I do not have a TIRA. If I did, and if I had the headroom, I would be "Rothing" each year the amount of money I could convert without boosting myself into the next highest tax bracket. If it were possible for me to count that amount of money toward my RMD, so much the better! Objective would be to Roth as much as I could, as quickly as I could, while minimizing tax impact of the conversion. Then I would sit back and hope for a long life of tax-free enjoyment. Heck, young as you are, Bozo, you could easily get another twenty years out of such a strategy . . . . and that is not chopped liver.
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Bozo
  |     |   1,375 posts since 2011
Kaight, you have assigned me a homework project.

Regards,

Bozo
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Anon1234
  |     |   114 posts since 2010
Kaight, unfortunately RMDs cannot be deposited into a Roth IRA. See:
http://time.com/money/3835309/retirement-required-minimum-distribution-roth/

I don't have an official IRS reference on the above.
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Anon1234
  |     |   114 posts since 2010
Still no info at IRS.GOV but 26 CFR 1.408A-4 - Converting amounts to Roth IRAs states that the amount contributed to the Roth IRA must satisfy the definition of a qualified rollover contribution in section 408A(e) (i.e., it must satisfy the requirements for a rollover contribution as defined in section 408(d)(3). That led me to: https://www.bradfordtaxinstitute.com/Endnotes/IRC_Section_408d3.pdf

Look for 408(d)(3)(E).

Hope that helps.
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Kaight
  |     |   1,192 posts since 2011
Thank you. Very interesting and much appreciated! OK, so to Roth TIRA money you must go beyond your RMD withdrawal. Not a shock, really. Rely on the IRS to establish rules at every turn which disadvantage the taxpayer!!

I am SO VERY glad I converted my TIRA many years ago; have no need for this insanity. Still OK it seems to convert TIRA money provided you pay the tax. I would do so in a heartbeat if I still had a TIRA and if I had the tax bracket headroom. If converting moved me into the next higher tax bracket I probably would not do so, except you have to allow for the value of having the IRS out of your IRA life, so I dunno. But conversions within an existing tax bracket would be an easy call, at least for me.
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Kaight
  |     |   1,192 posts since 2011
Further to what I just wrote, I found this sage advice at Kiplinger:

"Rather than searching for low-tax investments once the money is out of the IRA, start converting some money now from the traditional IRA to a Roth. You'll have to pay taxes on the conversion, but the money can grow tax-free in the Roth, and you're not required to take minimum distributions from it."

Kiplinger also provided this stern warning:

"When deciding how much to convert, be aware of the income thresholds for the Medicare Part B and Part D surcharge, which boosts premiums if your income tops $85,000 (for singles) or $170,000 (for joint filers). A large conversion in one year could also bump some money into the next tax bracket or cause more of your Social Security benefits to be taxed."

I am so happy I did all this years ago I could spit!! It was pure, unadulterated, LUCK!
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Ally6770
  |     |   4,307 posts since 2010
Just as the law changed that allowed us to convert my husband passed. I do convert as much as I can each year with out going over the $85,000 limit. I do not even spend my RMD and have never used all of my SS check after taking 25% out for taxes. Hopefully they will not change the law that we have to take out from our Roth each year. It has been considered. It will be nice for the children to inherit the Roths tax free.
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Kaight
  |     |   1,192 posts since 2011
You have done very well, Ally6770. Eventually everything will be converted.

I agree having a Roth is sort of a place of safety. Were they to take that benefit away retroactively it would be catastrophic. More likely, I think, if ever at all the Roth benefit might be taken from taxpayers only going forward. All the more reason to convert ASAP, exactly as you are doing.

All of that said, the current major tax reform legislation does not mess with our Roth benefits AFAIK. So perhaps Congress realizes how toxic any such change would be . . . . . . for them!!
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Ratesaver
  |     |   187 posts since 2013
Funny is the word for it::: I had my RMD set up with Valor Credit Union (remember them) as they were taken over by PenFed last yr... or so.... Well, my check from my traditional IRA from them never came.... Last yrs. came but after the takeover I guessed it wood just carry on.... Well, I will check up with them tomorrow... Others may have this same problem.... Just a thought
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johnbaker
  |     |   8 posts since 2017
This is really interesting...
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