Reducing the year end balance to reduce the RMD
In a discussion group, the idea came up of taking a non-taxable distribution prior to year’s end, rolling this money back into the IRA within the alloted 60 day period. When evaluating the value of the plan on 12/31 in order to compute the RMD distribtuion, it would be less because of the 60 day withdrawal. Is this a feasible tactic, and if so, can it be used every few years?
Permalink Submitted by Anonymous (not verified) on Tue, 2010-06-15 16:26
What is a non-taxable distribution out of a TIRA?
The RMD Regulations address this issue by requiring to add the rollover amounts back into the 12/31 balance. Otherwise, why not distribute 100% before years end and have no RMD due at all!
pko
Permalink Submitted by Alan Spross on Tue, 2010-06-15 18:48
pko is correct. This is covered in Pub 590 on p 34, “Outstanding Rollovers and recharacterizations”. I am not sure that the IRS or Congress detected this strategy immediately, but this loophole has been closed for years now. I suppose some taxpayers tried to accomplish the FMV reduction by doing Roth conversions and then recharacterizing them, and they would not even have used up a rollover in the process, but this loophole is also closed.
Note that the account balance of the receiving IRA is increased by the value of the rollover when it is received, not when it was distributed. Therefore, if an in kind distribution was taken (eg shares of stock), then the value of those shares when the rollover was completed is the amount the account balance is increased. If the shares lost money, the year end value for RMDs would be reduced, and if it gained the value would be increased over the value of the shares at distribution.
So if you owned alot of shares that went through a year end seasonal slump every year, I guess you could get some mileage under the current rules, but all of this does not seem worth the effort.
Permalink Submitted by mk foss on Tue, 2010-06-15 21:04
I have heard of people doing something similar in connection with tax payments. Assume that someone forgot one of the quarterly estimates of $5,000; if they were to request a withdrawal in December and ask that 100% of the withdrawal be paid in as federal income tax withholding, they could avoid an underpayment penalty. Then within 60 days – but in the next tax year, they could replace the $5,000 and make the distribution tax free. They’re no better off than they would have been if they had paid the $5,000 earlier in the year – but it looks like a tax free amount. Of course this had nothing to do with reducing the year ene balance to reduce the RMD – it’s only addressed to the comment about a tax free IRA distribution.
Permalink Submitted by Anonymous (not verified) on Tue, 2010-06-15 21:22
I am not sure that taking 100% WH and using that as a substitute for making a quarterly tax payment is even valid. I thought that when the WH is taken (at that point in time) and sent to the IRS via a tape, it is not earmarked under that SSN, but rather a big lump-sum monthly payment of all WH. Maybe someone can confirm this or explain better.
Thanks,
pko