This question is from the Ed Slott site.
Question:
My wife and I are both retired. We have a pension, social security and then comparatively large RMDs. We have no withholding and do not file quarterly estimated taxes. Rather, we have all our withholding done via our RMDs. AS YOU KNOW, A SPECIAL RULE ALLOWS US TO ALLOCATE THOSE PAYMENTS BACK TO PRIOR QUARTERS, SO WE AVOID ANY PENALTIES.
However, in order to do this, we need to wait until the fall, so we can get an idea of what our total tax liability (federal and state) will be. I don't even think about it until I get the current version of TurboTax. This is even more true this year, with a whole new tax code.
Plus, we don't want to give up tax deferred earnings for the better part of a year.
So, I agree with all your reasons for early withdrawals, but I can't see how I can have it both ways. Let me know if I'm missing something.
Thanks. Joel
Answer:
Hello, Joel:
There's no one best time to take an RMD, you have to choose amid trade-offs.
There are reasons to take an RMD early. Missed RMDs are subject to a 50% penalty, and taking one early assures it won't be missed as a last-minute RMD might be due to oversight, illness or some unexpected event. If an IRA owner dies before taking a last-minute IRA, it may be practically impossible for the IRA beneficiary to take it before year end. And if one is planning to make a Roth IRA conversion, any RMD due from the IRA for the year must be taken first.
But, as you note, taking your RMD late in the year and having your IRA custodian withhold income tax from it provides a unique benefit. The withholding, even if it occurs just before year-end, is credited as if it occurred at an even rate over the entire year. You can even increase the amount withheld from the RMD to cover tax owed on your other income received during the year.
This pays off two ways: (1) you keep funds in your IRA earning tax deferred returns for a longer period, and (2) you help your cash flow by deferring paying the income tax you owe until late in the year. In contrast, if you paid the income tax through quarterly estimated payments by paying all the tax in the year-end payment you could owe a late-payment penalty.
There's no one "right" answer. Each IRA owner must make a choice.
