IRA RMD withdrawals - single yearly transaction or multiple monthly, qtrly, etc .... ?

Ps56k2

I happen to see a couple of questions about RMD withdrawals and how to enter them.

I was curious, for those of you in this scenario - what your thinking is - for just doing a single yearly transaction, or spreading it out into monthly, qtrly, etc ... just curious.

Tom Young

Late December withdrawal; let it grow tax free for as long as possible. 

NotACPA

My late father, a retired "Big 6" CPA partner, withdrew quarterly ... and used those funds for living expenses.

I'm getting close to "RMD age", but I already w/d from my retirement accounts to fund living expenses.

bmciance

I would say it depends on whether you need the money for your monthly expenses.  If not, then do it annually.

I don’t have to do RMDs yet but I plan on doing them monthly when I do

volvogirl

I setup my husband's RMD in June so I know it's done before the end of the year.

Sherlock

I suppose it depends on whether you think the investment is likely to grow or if you need the funds.  We took a single RMD withdrawal in December 2018 and 2019.

Mark1104

I do them as soon as possible in January for two reasons

1) then I can begin conversions to my Roth as Roth conversions are not permitted until RMD is satisficed
2) it mitigates the risk that stock prices are lower at the end of the year than they were at the beginning of the year - think late 2018: if you waited until the end of the year to take the RMD, the stocks had to be liquidated at a low price to satisfy the RMD which is 'locked in' on January 1..... what I am trying to state is there is a timing mismatch as the RMD is a fixed number but the stock to satisfy that RMD is floating in the market.

i do find it fascinating that everyone is encouraged to 'cost average' into the market over the course of the working lives as you can't time the market, but when it comes to RMD, that thinking goes out the window and most appear to take RMD once per year - why not 4 or 12 times to 'cost average' out of the market (exception to the rule: if you have a Roth, you have to satisfy the RMD before funding the Roth)

gooddog50

I take the distribution as it seems appropriate, usually at the end of the year. However, I take most of the distribution in the form of shares of one or more securities, moving from a sheltered account to a taxable account. In doing so, it doesn't matter to me what the share price is, I'm just moving from one account to another, allowing the shares to continue to grow. If necessary, I'll liquidate something as needed. 

bmciance

@gooddog50 - I like that idea.  I’ll have to keep that in mind when the time comes.

Jim_Harman

@Mark1104,

One way to emulate dollar cost averaging when selling is to sell a fixed number of shares per month or quarter. That way you get more money if the price rises during the year and you reduce the risk of having to sell a large block of shares when the price is low. To smooth out your "Income" you could keep the proceeds from the sales in the IRA and transfer a fixed amount of cash per month to your spending account to meet the RMD requirement.

You would have to keep an eye on the amount of cash in the IRA and adjust the sales from time to time so you don't accumulate too much or run out.

Mark1104

@Jim_Harman- agreed;great recommendation 

Chris_QPW

bmciance said:

@gooddog50 - I like that idea.  I’ll have to keep that in mind when the time comes.

I also like that idea, it seems like the cleanest way to do it.  It separates the time to take out RMD from the time to sell, which in reality shouldn't be dictated by something as arbitrary as when you have to take out RMD.

I'm not going to worry about it much though.   I made a big deal about trying to plan to minimize taxes do doing Roth conversions and such, when my pay was going to be much lower just before taking Social Security (mostly because "being an engineer",  not because of "need") and in the end came to the realization that there were so many "timing variables" and such that it was really next to impossible be sure I would get the "best answer".  And the difference in taxes would actually be pretty small when I thought of it over my life time.  When you go through bad times in the stock market and watch your portfolio drop by $20,000 in a day, it should make you wonder about the idea of saving $20,000 in taxes over you life time trying to time things.

All I want now is "don't make a big mistake".

In a way I guess I have a different view point these days.  I have seen people complain about the fact that they "only doubled" their money, because if they had held their company shares about a month more they would have tripled their money.  Or the people that talk about not being sure if they want some extra pay because it "might put them in a higher tax bracket"!  Which of course ridiculous since you only pay extra and the amount that is in the higher bracket, but more to the point is that you still keep most of it, and most is better than none.

The way I look at it these days is the government allowed me to invest without taxes all these years and now they want me to start paying it, seems pretty fair to me.

At times I have said I'm a terrible investor, but my saving grace is I'm a great saver.  So I guess I "leave a lot of money on the table", but we have been lucky and have plenty left at the rate that we spend it.

gooddog50

@Chris_QPW
All I want now is "don't make a big mistake".  LOL, Ain't that the truth. Fortunately, if you live long enough "the trend is generally your friend". 

Sherlock

gooddog50 said:

I take the distribution as it seems appropriate, usually at the end of the year. However, I take most of the distribution in the form of shares of one or more securities, moving from a sheltered account to a taxable account. In doing so, it doesn't matter to me what the share price is, I'm just moving from one account to another, allowing the shares to continue to grow. If necessary, I'll liquidate something as needed. 

We do that as well, however, it does matter what the share price is if the security pays dividends.  To defer the taxes on the dividends, we want to transfer as few shares from the sheltered account.

Ps56k2

Sherlock said:  To defer the taxes on the dividends, we want to transfer as few shares from the sheltered account.

interesting... different topic than just "when" but also "what" -
the difference between the sheltered growth funds vs the div & income producing funds...
which were sheltered and not taxed - and if migrated as part of the RMD, now become taxed.

Chris_QPW

Ps56k2 said:

Sherlock said:  To defer the taxes on the dividends, we want to transfer as few shares from the sheltered account.

interesting... different topic than just "when" but also "what" -
the difference between the sheltered growth funds vs the div & income producing funds...
which were sheltered and not taxed - and if migrated as part of the RMD, now become taxed.

Even though this is quite true my crystal ball broke many years ago so deciding on how to accomplish this is also lacking.  As one person pointed out there isn't anything stopping the stock market from taking a dive right before the end of the year, so you can't count on that being the best time to get the most money with the least amount of shares.

If there is anyone that has a fool proof way of predicting such things I would love to hear it.
Otherwise I'm more interested in selling based when I think it is a good time to sell like when balancing my portfolio than because what may or may not turn out to be a bit better on the tax front.

Rocket J Squirrel

Allow me to present the RJS™ foolproof RMD system. It relieves me from choosing securities to migrate from IRA to taxable accounts.

(Note that I am a young guy; I don't have RMDs from my own IRAs yet. But I have an Inherited IRA from which I must take RMDs.)

In my inherited IRA, I maintain a bond/CD ladder, among other securities. One or more bonds or CDs matures every year. Upon maturity, those dollars come out of the IRA into a brokerage account, satisfying the RMD. (Quicken's "Maturity Dates" report became my new best friend when it appeared.)

The other benefit of this approach is that it causes me to maintain positions in Fixed Income and thus have a more conservative portfolio than if I were all in equities. (OK, I'm not really that young, so this is good for me.) It did become less attractive when fixed income yields plummeted in recent years, but I can afford it in the name of safety and peace of mind.

Ps56k2

So... just to clarify -
you don't have to actually "sell" the IRA assets -
but just reduce your overall IRA net worth balance by the amount calculated as the RMD -
either by actually "selling" or by "removing or tranferring" out of the IRA bucket net worth balance.

Chris_QPW

@Ps56k2 I'm not sure if you are referring to my comment, but if you were, what I was saying might not be clear.  @Sherlock's comment "we want to transfer as few shares from the sheltered account." says to transfer as few shares as possible.  RMD is dollar amount, so how much to transfer is number of shares times the price.  And the way to transfer the least is to somehow know when the price is going to be at its maximum, which isn't possible.

In my last part of maybe I sort of went off topic, but I was basically trying to say I'm more worried about my plans of selling securities than trying to minimize the tax on the dividends.

Sherlock

Ps56k2 said:

So... just to clarify -
you don't have to actually "sell" the IRA assets -
but just reduce your overall IRA net worth balance by the amount calculated as the RMD -
either by actually "selling" or by "removing or tranferring" out of the IRA bucket net worth balance.

In the real world, we may transfer the RMD as securities (aka in kind).  In Quicken, we may enter the sale of the shares, transfer the funds, and repurchase securities so we may track the income and establish the new cost basis.

Bob_L

I take mine out monthly from the money fund balance.  One thing not mentioned so far is that the age old defer, defer defer advice can result in a nasty surprise regarding significant penalties added to the cost of your Medicare B and Medicare D premiums because you made too much Modified Adjusted Gross income (AGI plus tax exempt income).  

jtemplin

@Chris_QPW
All I want now is "don't make a big mistake".

I can very much relate to this. I do volunteer tax returns for elderly folks with the AARP-TaxAide program, and I see big (and costly) mistakes all the time. I frequently urge folks that before they make any large financial moves to TALK TO SOMEONE FIRST. 

Strangest story: a widow inherited her husband's $400K IRA and she immediately withdrew all of it at once, despite the advice she got from his broker not to. "I didn't listen to him because I needed the money to live on," she said. That $400K was all taxable income. Got hit with a $175K tax bill. Almost half it gone.

Chris_QPW

@jtemplin That is a very sad story.  I'm guessing that unfortunately isn't that untypical.  You have one person doing all the finances and they die and the other basically knows nothing about the finances and has a big learning curve.

Sherlock

I thought it worth mentioning an exception applies to the first age required RMD which is required by April 1 of the following year.

bmciance

@Sherlock that’s true but you also need to be careful of the tax consequences of doing that since you would end up with two years of RMDs in one year since the second one can’t be pushed beyond the end of the year.