Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Turning 70 in 2018. Is there a best time to take my IRA RMD? Early in year, late (before/after) dividend and capital gains distribution? I'll be reinvesting most of it anyway since I'm still working and can leave my 401K alone. Any thoughts?
Dividend timing inside an IRA doesn't matter, but if you're going to be taking the distribution in kind, or investing in something else that likewise pays an annual dividend, then you may want to wait until after the dividend. Otherwise you'll effectively be "buying a dividend" in the taxable account (getting an immediately taxable dividend for no reason other than timing).
Generally speaking, it's better to delay as long as possible taking RMDs. That's because you assume that your investment will go up in value, and you'd like to shelter that extra growth as long as possible. Note though that if you're doing Roth conversions, you're not allowed to do that before you take your RMD for the year.
Then there's the question of which year to take your first RMD.
What matters is not when you turn 70, but when you turn 70.5. So if you were born after June, you won't turn 70.5 until 2019.
You're allowed to delay your first RMD until April 1 (not April 15) of the year after you turn 70.5. Say you turn 70.5 in 2018. Then you can take your first RMD any time up to April 1, 2019. If you turn 70.5 in 2019, you can take your first RMD any time up to April 1, 2020.
But if you delay your first RMD until the following year, you'll have to take two RMDs that year (the delayed RMD and the regular RMD for that year). If that doesn't move you into another bracket or have other bad effects like increasing the tax you pay on SS, waiting that long can be a good move. If doubling RMDs for a year hurts tax-wise, then you may want to take your first RMD around the end of December, rather than around the end of the following March.
70 in April, so I'll have to think about the consequences of delaying, and taking 2 RMD's in 2019. I'm already paying a stiff penalty on SS premiums, and I haven't started collecting yet! If I'm understanding correctly, taking the RMD after the IRA's make their distributions seems to be the smart route, and I wouldn't reinvest it until the "buying a dividend" date is past.
Some RMD Math for first RMD: 70 in April 2018 70.5 in October 2018 (2) choices for first RMD: 1. By end of December 2018 (based on 2017 FMV (Fair Market Value divided by 26.5) 2. By April 1, 2019 (based on 2018 FMV divided by 26.5)
Also, If you wait and choose take (two) RMD in the same year (by April 1, 2019/ by Dec 31, 2019) both of the calculations will be based on the same FMV on December 31, 2018.
If you take your first RMD in 2018 (by the end of December) you would use 2017 FMV (Fair Market Value on Dec, 31, 2017).
First years RMD divisor is 26.5. The second RMD is 25.6
You might be able to do a pretty close comparison of these tow options in early/mid Dec of 2018 by comparing FMV of 2017 to 2018.
Some RMD Math for first RMD: 70 in April 2018 70.5 in October 2018 (2) choices for first RMD: 1. By end of December 2018 (based on 2017 FMV (Fair Market Value divided by 26.5) 2. By April 1, 2019 (based on 2018 FMV divided by 26.5)
From IRS Pub 590b: "The IRA account balance [what you use to calculate your RMD] is the amount in the IRA at the end of the year preceding the year for which the required minimum distribution is being figured."
That's the key. In the example above, the first RMD is for 2018 (even if it's deferred until April 1, 2019). So you use the ending balance of 2017 to compute the first RMD, regardless of when you take it (choice (1) or choice (2)).
Here's IRS's Example 1 a little later in the same Pub590b (I just modified it by adding 2 to all the years to make it line up with bee's example above):
Example 1. Laura was born on October 1, 1947. She reaches age 70½ in 2018. Her required beginning date is April 1, 2019. As of December 31, 2017, her IRA account balance was $26,500. No rollover or recharacterization amounts were outstanding. Using Table III in Appendix B, the applicable distribution period for someone her age (71) is 26.5 years. Her required minimum distribution for 2018 is $1,000 ($26,500 ÷ 26.5). That amount is distributed to her on April 1, 2019.
70 in April, so I'll have to think about the consequences of delaying, and taking 2 RMD's in 2019. I'm already paying a stiff penalty on SS premiums, and I haven't started collecting yet! If I'm understanding correctly, taking the RMD after the IRA's make their distributions seems to be the smart route, and I wouldn't reinvest it until the "buying a dividend" date is past.
That's basically it, though I gave a poor example of where increasing your income (by doubling the number of RMDs in a year) would hurt. Oh heck, I'll be blunt - I gave a totally inappropriate example. I was thinking of the SS benefit reduction for someone who is working and taking benefits before full retirement age (FRA). You're past FRA, so increasing your income won't reduce your upcoming SS benefits.
Here's a better example. Since you're over 65, you may be on Medicare (if your employer isn't providing coverage). Medicare premiums go up for the few fortunate seniors who are making a lot (over $85K single, $170K couple). So you might be just below $85K including one RMD, but that second RMD could put you over $85K. Then your Medicare premiums would jump by 40%.
The best time to take a RMD (march to someone else's tune) is never.
So I'd suggest converting as much as possible to Roth status. Normally, Roths are not subject to RMD. So, converting as much as you can afford to a Roth IRA would reduce the size of your RMDs going forward. Conversions are best done before reaching distribution age - but are allowed even when of distribution age as long as you first meet the year's RMD requirement.
If you have multiple fiduciaries, converting 100% with one (or several) greatly simplifies the calculation of RMDs on the remaining non-Roth portion going forward.
I'm a little unclear from the question whether all your assets are under the same "pre-tax" sheltered vehicle or whether, as is suggested, you plan to take RMDs from an IRA that is separate from your workplace 401-K. In either case, the money should be eligible for conversion.
Edit: I've done 3 conversions since retiring - the last one at age 69. There is a 5-year minimum "wait time" after conversion. If not adhered to, penalties ensue. While my reading suggests that the "wait time" applies only to the gains and not the initial conversion amount, I'm not 100% certain on that point (and am not a tax attorney). Consequently, I've chosen to wait the 5 years on each conversion before withdrawing any funds.
With respect to the increase in Medicare premiums that may ensue if one takes two RMDs in the same calendar year, it is possible to appeal to Medicare for a return to the lower premium rate if one can show that the one year with the high income was an outlier. One year, through bad planning, we managed to cross the $170,00 line and Medicare bumped our premiums up. We had to pay them for one year, but the appeal was successful and we've been paying the lower rate since. There are other penalties for higher earners also; certain tax credits, such as those for higher education, start to phase out, for instance.
There's lots of stuff that gets affected at all sorts of levels with increased income. They tend to be convoluted and hard to explain, which is why I picked the examples I did. Thanks for pointing out that there's an appeal process in the case of Medicare premiums.
With respect to the increase in Medicare premiums that may ensue if one takes two RMDs in the same calendar year, it is possible to appeal to Medicare for a return to the lower premium rate if one can show that the one year with the high income was an outlier. One year, through bad planning, we managed to cross the $170,00 line and Medicare bumped our premiums up. We had to pay them for one year, but the appeal was successful and we've been paying the lower rate since. There are other penalties for higher earners also; certain tax credits, such as those for higher education, start to phase out, for instance.
That answers a question I always wondered about. But I thought Medicare premiums were based on your 1040. So I assumed if there was a large bump up one year in your premiums that it would be adjusted back based on your following year's 1040 showing lower income.
I encountered this situation, also, some years ago. I have forgotten the details, but you are correct that you can/should/must re-appeal in subsequent years.. My principal recollection is that the increase was applied for 3 successive years, but if you were qualified for reduction on appeal, you had to appeal again for each year that the additional assessment was applied (I believe 2 additional years). It was not automatic. Sorry I don't recall more details, but the moral is that if you encounter this situation, don't just assume that you don't need to re-appeal.
A couple of points: (1) the excess Medicare premiums (i.e. taxes) are based on your Adjusted Gross Income a year previous. The penalties apply to Part B and Part D, for husband and wife. Can be stiff. So anything you can do to reduce that line on Form 1040 might be helpful. Such as a capital loss. There are certain thresholds, so holding that income down, but not far enough down to drop below the the next threshold, might not affect the Medicare premiums. It still may help with other items (medical deductions threshold, etc) (2) For me, the best way to drop that all-important income amount is to make Qualified Charitable Distributions from my IRA. The RMD becomes a charitable gift and never makes it to the bottom line. It's not like taking out the IRA money as cash, then making a charitable contribution and taking a deduction on Schedule A. With a QCD, it's as if the whole event never happened. This has been around a while as one of those features that Congress approved late in the year. Finally, they've approved it permanently, so you can count on it.
So I took my 2017 RMD in January as a QCD and felt righteous and charitable. Will do the same thing in January 2018.
ISTM that there are two principal benefits to making qualified charitable distributions (as opposed to simply taking the contribution as an itemized deduction);
- It reduces the top line income - adjusted gross income and corresponding MAGI for things like Medicare premiums, taxation of SS benefits, and as mentioned above, deduction thresholds like medical and misc.
- For people who don't itemize, it gives them the same tax break as if they'd itemized the contributions
Note that Medicare premiums are based on your income two years prior. For example, 2017's income will determine 2019's premiums. It has to work this way because when you get billed for your Jan 2019 coverage, you won't have yet filed your 2018 tax return.
I personally take my RMD in late march in case I need money to pay income tax but if you believe in market timing its had to do much better than sell in may.
Just to supply additional info: I have 2 traditional IRA's (VSEQX $200K, and VSTCX $350K), a Roth IRA (VGELX $120K), and an AXA 401K ($500K). I turn 70 in 4/18. I'm still working so I have earned income (~$100K), deferred SS benefits (~$25K) which I'll start collecting at age 70, a pension ($21K), and don't have to take RMD's from the 401K while still employed. I hadn't given any thought to Roth conversions but the idea intrigues me. Would Vanguard be the place to start with figuring the tax hit on converting 1 this year, and the other in 2018? Any advice is appreciated.
You may not want to convert a whole IRA at once (you're allowed to convert any amount lesser amount you want). That could put you into a much higher tax bracket. But with $1M+ in tax-deferred accounts, you may still want to convert some money, year by year, so that you don't wind up with a big account later in life that kicks you into a really really high tax bracket.
Once you retire, it sounds like you'll be getting around half your current income in pension and SS (the latter will be adjusted for inflation). So you might have an extra $50K of room then before you hit your current income. But, if you're single, you'll also want to keep MAGI below $85K to avoid a 40% surcharge on your Medicare parts B and D premiums. That doesn't leave you much wiggle room.
You've got a couple of choices of strategies. You might convert as much now as you can while staying in the 28% (not 25%) bracket. IMHO it's worth eating the extra 3% to help reduce the potential buildup of RMDs later. Also, there's a slight tax advantage to converting (you get more after-tax dollars sheltered) that somewhat offsets the slightly higher income tax now. Then you convert as much as you can annually while staying under the Medicare surcharge cap.
You might do the conversions as you suggested, taking the 33% tax hit but not having to worry about Medicare surcharges or the tax-deferred accounts growing faster than you can get money out. (So that you certain to avoid the problem of having huge RMDs later.)
As to how much to convert - convert more than the dollar amount you want. Then when you do your taxes in April, you can recharacterize (unconvert) just the right amount to hit whatever tax bracket you're shooting for.
Finally, note that each year you must take your RMD before doing any conversions. That's just the way the rules are written. And Vanguard is a fine place to do all of this.
The only advice would be to be careful not to co-mingle different Roth conversions - particularily during the early years. You wouldn’t have to worry about co-mingling with non-Roth (thru exchanges) because your fiduciary won’t allow it. But it could be very confusing if you were to do a conversion at VG in ‘17 and another in ‘19 and than intentionally or inadverdantly exchange between the two. The reason is the 5-year waiting period I mentioned. The fiduciary would probably allow such an exchange, but sorting everything out for tax purposes could be a nightmare. That’s where I think I benefitted from doing 100% of assets at each of several fiduciaries for different years. Your problem (a nice one to have) is that your amounts far exceed what I was dealing with.
If I were going to do several at one fiduciary over different years, I’d at least try to do it in different funds and not co-mingle those during the 5 year wait period. My conversions were all attempts to catch various markets near bottoms (partially successful). But with most everything seemingly richly valued at the moment, converting assets in short term bonds or conservative allocation funds might not be a bad idea. Those assets could always be moved into more aggressive funds (perhaps in stages) if markets were to become more reasonably valued. Exchanging from one fund to another isn’t a problem as long as you don’t co-mingle different Roth conversions early on.
Also - Re what to convert? There’s two schools of thought. Conventional wisdom (and I dare say most advisors) recommend that one’s more aggressive assets be held in the Roth portion. Personally, I can make a case for the other way around. With pre-tax money you are taking market risk with a combination of your own money and the government’s money (the unpaid tax portion). With a Roth investment you are putting at risk 100% of your own money. At younger ages I’d prefer having my Roths more aggressively invested. At 65 and over ... not sure it makes a lot of difference.
(Not a financial advisor. Strictly some thoughts from a layperson.)
Comments
Generally speaking, it's better to delay as long as possible taking RMDs. That's because you assume that your investment will go up in value, and you'd like to shelter that extra growth as long as possible. Note though that if you're doing Roth conversions, you're not allowed to do that before you take your RMD for the year.
Then there's the question of which year to take your first RMD.
What matters is not when you turn 70, but when you turn 70.5. So if you were born after June, you won't turn 70.5 until 2019.
You're allowed to delay your first RMD until April 1 (not April 15) of the year after you turn 70.5. Say you turn 70.5 in 2018. Then you can take your first RMD any time up to April 1, 2019. If you turn 70.5 in 2019, you can take your first RMD any time up to April 1, 2020.
But if you delay your first RMD until the following year, you'll have to take two RMDs that year (the delayed RMD and the regular RMD for that year). If that doesn't move you into another bracket or have other bad effects like increasing the tax you pay on SS, waiting that long can be a good move. If doubling RMDs for a year hurts tax-wise, then you may want to take your first RMD around the end of December, rather than around the end of the following March.
70 in April 2018
70.5 in October 2018
(2) choices for first RMD:
1. By end of December 2018 (based on 2017 FMV (Fair Market Value divided by 26.5)
2. By April 1, 2019 (based on 2018 FMV divided by 26.5)
Also, If you wait and choose take (two) RMD in the same year (by April 1, 2019/ by Dec 31, 2019) both of the calculations will be based on the same FMV on December 31, 2018.
If you take your first RMD in 2018 (by the end of December) you would use 2017 FMV (Fair Market Value on Dec, 31, 2017).
First years RMD divisor is 26.5. The second RMD is 25.6
You might be able to do a pretty close comparison of these tow options in early/mid Dec of 2018 by comparing FMV of 2017 to 2018.
Investopedia Link on the Topic:
investopedia.com/articles/retirement/04/120604.asp
Thanks to all.
70 in April 2018
70.5 in October 2018
(2) choices for first RMD:
1. By end of December 2018 (based on 2017 FMV (Fair Market Value divided by 26.5)
2. By April 1, 2019 (based on 2018 FMV divided by 26.5)
From IRS Pub 590b: "The IRA account balance [what you use to calculate your RMD] is the amount in the IRA at the end of the year preceding the year for which the required minimum distribution is being figured."
That's the key. In the example above, the first RMD is for 2018 (even if it's deferred until April 1, 2019). So you use the ending balance of 2017 to compute the first RMD, regardless of when you take it (choice (1) or choice (2)).
Here's IRS's Example 1 a little later in the same Pub590b (I just modified it by adding 2 to all the years to make it line up with bee's example above):
Example 1.
Laura was born on October 1, 1947. She reaches age 70½ in 2018. Her required beginning date is April 1, 2019. As of December 31, 2017, her IRA account balance was $26,500. No rollover or recharacterization amounts were outstanding. Using Table III in Appendix B, the applicable distribution period for someone her age (71) is 26.5 years. Her required minimum distribution for 2018 is $1,000 ($26,500 ÷ 26.5). That amount is distributed to her on April 1, 2019.
https://www.irs.gov/publications/p590b#en_US_2016_publink1000230736
Here's a better example. Since you're over 65, you may be on Medicare (if your employer isn't providing coverage). Medicare premiums go up for the few fortunate seniors who are making a lot (over $85K single, $170K couple). So you might be just below $85K including one RMD, but that second RMD could put you over $85K. Then your Medicare premiums would jump by 40%.
https://www.medicareinteractive.org/get-answers/how-original-medicare-works/original-medicare-cost-overview/what-you-pay-for-part-b-if-your-income-is-high
That's interesting...If I am incorrect, I apologize.
I hope corrected information gets formalize early enough for bilvihur to act appropriately.
So I'd suggest converting as much as possible to Roth status. Normally, Roths are not subject to RMD. So, converting as much as you can afford to a Roth IRA would reduce the size of your RMDs going forward. Conversions are best done before reaching distribution age - but are allowed even when of distribution age as long as you first meet the year's RMD requirement.
If you have multiple fiduciaries, converting 100% with one (or several) greatly simplifies the calculation of RMDs on the remaining non-Roth portion going forward.
I'm a little unclear from the question whether all your assets are under the same "pre-tax" sheltered
vehicle or whether, as is suggested, you plan to take RMDs from an IRA that is separate from your workplace 401-K. In either case, the money should be eligible for conversion.
Converting to Roth after 70.5 https://www.irahelp.com/slottreport/4-steps-taking-roth-conversion-after-age-70-12
Rolling over/converting a workplace plan while still working http://finance.zacks.com/roll-over-401k-still-working-8501.html
-
Edit: I've done 3 conversions since retiring - the last one at age 69. There is a 5-year minimum "wait time" after conversion. If not adhered to, penalties ensue. While my reading suggests that the "wait time" applies only to the gains and not the initial conversion amount, I'm not 100% certain on that point (and am not a tax attorney). Consequently, I've chosen to wait the 5 years on each conversion before withdrawing any funds.
(1) the excess Medicare premiums (i.e. taxes) are based on your Adjusted Gross Income a year previous. The penalties apply to Part B and Part D, for husband and wife. Can be stiff. So anything you can do to reduce that line on Form 1040 might be helpful. Such as a capital loss. There are certain thresholds, so holding that income down, but not far enough down to drop below the the next threshold, might not affect the Medicare premiums. It still may help with other items (medical deductions threshold, etc)
(2) For me, the best way to drop that all-important income amount is to make Qualified Charitable Distributions from my IRA. The RMD becomes a charitable gift and never makes it to the bottom line. It's not like taking out the IRA money as cash, then making a charitable contribution and taking a deduction on Schedule A. With a QCD, it's as if the whole event never happened.
This has been around a while as one of those features that Congress approved late in the year. Finally, they've approved it permanently, so you can count on it.
So I took my 2017 RMD in January as a QCD and felt righteous and charitable. Will do the same thing in January 2018.
(I'm not a tax expert -- do your own research!)
- It reduces the top line income - adjusted gross income and corresponding MAGI for things like Medicare premiums, taxation of SS benefits, and as mentioned above, deduction thresholds like medical and misc.
- For people who don't itemize, it gives them the same tax break as if they'd itemized the contributions
Note that Medicare premiums are based on your income two years prior. For example, 2017's income will determine 2019's premiums. It has to work this way because when you get billed for your Jan 2019 coverage, you won't have yet filed your 2018 tax return.
Once you retire, it sounds like you'll be getting around half your current income in pension and SS (the latter will be adjusted for inflation). So you might have an extra $50K of room then before you hit your current income. But, if you're single, you'll also want to keep MAGI below $85K to avoid a 40% surcharge on your Medicare parts B and D premiums. That doesn't leave you much wiggle room.
You've got a couple of choices of strategies. You might convert as much now as you can while staying in the 28% (not 25%) bracket. IMHO it's worth eating the extra 3% to help reduce the potential buildup of RMDs later. Also, there's a slight tax advantage to converting (you get more after-tax dollars sheltered) that somewhat offsets the slightly higher income tax now. Then you convert as much as you can annually while staying under the Medicare surcharge cap.
You might do the conversions as you suggested, taking the 33% tax hit but not having to worry about Medicare surcharges or the tax-deferred accounts growing faster than you can get money out. (So that you certain to avoid the problem of having huge RMDs later.)
As to how much to convert - convert more than the dollar amount you want. Then when you do your taxes in April, you can recharacterize (unconvert) just the right amount to hit whatever tax bracket you're shooting for.
Finally, note that each year you must take your RMD before doing any conversions. That's just the way the rules are written. And Vanguard is a fine place to do all of this.
If I were going to do several at one fiduciary over different years, I’d at least try to do it in different funds and not co-mingle those during the 5 year wait period. My conversions were all attempts to catch various markets near bottoms (partially successful). But with most everything seemingly richly valued at the moment, converting assets in short term bonds or conservative allocation funds might not be a bad idea. Those assets could always be moved into more aggressive funds (perhaps in stages) if markets were to become more reasonably valued. Exchanging from one fund to another isn’t a problem as long as you don’t co-mingle different Roth conversions early on.
Also - Re what to convert? There’s two schools of thought. Conventional wisdom (and I dare say most advisors) recommend that one’s more aggressive assets be held in the Roth portion. Personally, I can make a case for the other way around. With pre-tax money you are taking market risk with a combination of your own money and the government’s money (the unpaid tax portion). With a Roth investment you are putting at risk 100% of your own money. At younger ages I’d prefer having my Roths more aggressively invested. At 65 and over ... not sure it makes a lot of difference.
(Not a financial advisor. Strictly some thoughts from a layperson.)