RMD Strategy with non-deductible IRA
Greetings!
I have a client that will be taking his first RMD. He has two Traditional IRAs at the same custodian. IRA #1 is a rollover from a 401k Plan ($365k). All pre-tax contributions. IRA #2 is a combination of pre and after tax contributions. It consists of $12k in pre tax contributions and $62k in after tax contributions. This $74k total contribution has a current balance of $148k. It is my understanding that he can take his combined RMD from one account. I also think I understand that based on a percentage (not really sure if it is based on initial contribution or balance) that a portion of the RMD will not be taxable. I know that he should submit Form 8606. (Not an accountant and not giving tax advise). The question is….would there be a tax benefit to him if he takes his RMD solely from IRA #1 (pre-tax) to maintain a higher percentage of after tax dollars?
Thanks. I can clarify or provide additional info.
Ed
Permalink Submitted by Alan - IRA critic on Thu, 2014-06-19 18:28
There would be no benefit of taking the RMD from any one account because Form 8606 computes the taxable amount by combining all non Roth owned IRA valuations. So while the RMD can be satisfied by taking the distribution in any combination from the two IRA accounts, the taxable amount will be the same. The non taxable amount would be 62/513 (12.09%) of any amount distributed. If this is the first RMD distribution year (turns 70.5 this year), he can take any portion he wants this year as long as the total 2014 RMD is completed no later than 4/1/2015. This flexibility only occurs in the first RMD year, but client may save taxes in total for 2014 and 2015 if a tax program is used to determine how much of the first RMD to take this year. The taxable share is 87.91 using the valuations you provided, but those values will change by 12/31/2014 and change again by 12/31/2015. If there are gains the taxable share will increase, if there are losses it will decrease. The amount of the RMD is determined using the prior year end balance but the taxable share of the RMD is determined by using an adjusted current year end balance,