How and when to take your RMD

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Natalie Choate

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As an IRA owner aged 72 and over, you have options as to when to make your annual “Minimum Required Distribution” (RMD). You can take it at the beginning of the year, take it in monthly or other regular installments, or wait until the last minute. Which is the best?

Surprise – there is no one “best” time to take the RMD. Each option has advantages and disadvantages. The upside of the RMD at the beginning of the year is that you get it over with. You don’t have to take care of this special obligation again until next year. You can reinvest the distribution immediately, spend it gradually over the course of the year, or carry out part of it at a time. The option to cope with the beginning of the year is especially popular with those in need of money: you know you will have to take the money out of your IRA sometime this year, so you might as well do it now instead of borrowing money to Paying for your urgent obligations. And who knows, maybe later in the year there will be a little more money coming from other sources and you won’t have to borrow (or make additional IRA distributions) at all.

However, there are drawbacks to taking the RMD at the beginning of the year. If you pay your estimated taxes based on the actual quarterly taxes owed, you will pay tax on your RMD at the beginning of the year if you received it at the beginning of the year, so you will lose your use of that tax money sooner. If Congress in the middle of the year decides to get rid of the RMD requirement for that year (as it did in 2020 – getting rid of the requirement in March 2020 after many people had already taken their 2020 RMD), you’ll have to mix and match around that already Reverting the RMD taken – if it is at all possible to reverse it, you must encrypt to reverse the RMD already taken – if it is at all possible to reverse it.

Some proponents wait until the end of the year to receive the RMD in order to achieve several goals: delay the income tax payable on the distribution for as long as possible, maximize the deferred return within the retirement account, and take advantage of all the new offers Pop up for RMDs later in the year. Delaying the RMD until the end of the year is also helpful for those using the RMD to kill two birds with one stone – meet RMD requirements and pay their estimated taxes. See discussion of this idea below.

Another good (if a little gloomy) reason to wait as long as possible to take your RMD is when you don’t need these distributions and leave your IRA to charity: if you die during the year before taking the RMD , the RMD for this year goes to the charity and is never subject to income tax.

For those using their RMDs as a source of regular retirement income payments, similar to an annuity or annuity, a popular choice is to pay the RMD in monthly installments, ideally with any applicable income taxes withheld and sent directly to the government . This gives the retiree a satisfactory monthly income with no big tax surprises at the end of the year – an appealing facility for those who want to spend their time traveling, gardening, or golfing rather than wrestling with paperwork or clashing with an accountant.

How (in what form) you should take this RMD, there are again options, each with advantages and disadvantages. The first thing to consider is to make your charitable contributions for the year directly from the IRA in the form of “Qualified Charitable Distributions” (QCDs). For more information on QCDs, see this November 2016 column. This will almost certainly save you some income taxes as the QCD portion of the RMD is not included in your gross income and you may be able to take the standard deduction for your 1040. In two years, your Medicare premiums may even be lowered.

Another tax-savvy way to use RMDs is to wait until the end of the year and then instruct the IRA provider to submit all or most of the RMD as “withheld income taxes” to the IRS (and the relevant state government, if You pay state income tax). “Taxes withheld from pension plan distributions, such as taxes withheld from wages, are deemed to have been paid pro rata throughout the tax year … even if the tax is not actually withheld and paid to the government until near the end of the year. The IRA owner may be able to reduce or cancel their estimated tax payments otherwise owed on April 15, June 15 and September 15 of that year if these obligations are deemed met by withholding an IRA distribution towards the end of the year become .

Are your beneficiaries interested in how and when you take your RMDs? Not that they have a vested interest in their future inheritance from your IRA, but if you want to know how your RMD decisions will affect your beneficiaries, here is the answer:

To the extent that before your death you did not take your RMD for the year of your death, your beneficiaries must take it after your death. Chances are they won’t complain about this as they inherit this undistributed amount that otherwise would have gone to someone else at your will. But if you die late in the year without taking the RMD, the beneficiaries will have to struggle to get it on time … and if you haven’t paid your estimated taxes for the year of your death (because you were) when If you plan to take advantage of the withholding idea towards the end of the year to resolve this, your executor may owe the IRS some penalties for this mistake. All in all, however, your beneficiaries probably don’t need to be part of your concerns about when and how to take your RMD, unless there is a high chance they will die in the near future.

Next question: Should you accept your RMDs in cash or in kind? A distribution in kind means distributing assets (like stocks or bonds) instead of cash. Either way is a perfectly legal way to meet the RMD requirement, but cash is MUCH easier. There may be good reasons for distributing assets – for example, if there is an investment you’d rather own outside of the IRA – but without a good reason, you will have to delve into distributing assets that don’t exist, deal with several issues with cash distributions, e.g. B. what value applies to the distribution. For purposes of calculating income tax (and RMD compliance) on that distributed portion of the stock, will the stock be valued at the opening price, closing price, or average price on the day of distribution? Your future base in the stock will also be the fair market value at the time of distribution – but your financial company’s computer may not recognize this and may continue to display the original purchase price (within the IRA) as your “base”. Avoid those headaches by paying RMDs in cash unless there’s a damn good reason to distribute assets.

One question only arises in connection with the first RMD: whether this first RMD should be used during the first “sales year” (year for which an RMD is required) or the permissible postponement (only for the first sales year) until April 1 of the following year. For example, for someone who turns 72 in 2021, 2021 is the first distribution year for their IRA, but the 2021 RMD can be postponed to April 1, 2022. Is it better to postpone the RMD to get an additional forbearance or do you take it in 2021 to avoid pooling two RMDs in 2022? Each participant must decide this with the advice of a planner, taking into account the expected income level of the individual for the two years and the likelihood of changes in tax law.

One final question: which account should you take out your RMD from? If you own multiple IRAs, you can apply the combined RMD to all of one or more of them. This can be a great way to make paying RMDs in cash easier when one IRA has a lot of cash and another has only investments that would be difficult (or undesirable) to split or sell: just pay the RMD for all of yours IRAs out of cash. heavier. This rule also helps in getting rid of redundant accounts. Take the RMD for all of your IRAs from the smallest or most consumable account, so that account will be closed in a few years. This ability to pull all RMDs for the year from one or more accounts also applies to 403 (b) plans. However, it does not allow the IRA participant (or 403 (b)) to combine their own IRAs (or 403 (b) accounts) with any other account type or with IRAs or 403 (b) accounts. They are considered a Beneficiary: One Inherited IRAs (or 403 (b)) can only be combined with other Inherited IRAs (or 403 (b)) (for the purpose of taking RMDs for all these accounts from one of them) as the beneficiary of the same deceased.

Where can you read more: For more ideas on how to use retirement benefit plan distributions, see the author’s special report: Your Client’s 200+ Best and Worst Planning Ideas for Your Customers’ Retirement Plans, available at www.ataxplan.com. For details on the withholding tax rules for the distribution of retirement benefit plans, see ¶ 2.3 Life and Death Planning for Retirement Benefits (8th Edition 2019; www.ataxplan.com); Refer to Chapter 1 of this book for complete information on the minimum lifetime distribution rules.

Editor’s Note: The reference to eliminating the RMD requirement has been changed to correct the year to 2020.

Natalie Choate is a Boston estate planning attorney with Nutter McClennen & Fish LLP. Her practice is limited to providing advice on retirement benefits. The 2019 edition of Choate’s bestseller, Life and death planning for retirement benefitsis available on their website www.ataxplan.com. There you can also view your lecture schedule and ask questions about this column. The views expressed in this article do not necessarily reflect those of Morningstar.