RMD Workaround

Submitted by Florina Chuy on Sun, 2019-12-29 16:42

Kiplinger published an article entitled “The Most-Overlooked Tax Breaks for Retirees” on December 12, 2019
(https://www.kiplinger.com/slideshow/retirement/T054-S001-most-overlooked-tax-breaks-deductions-for-retirees/index.html).
Under the topic “The RMD Workaround” (Slide 7 of 10), one could wait till December to do the RMD from an IRA, since “amounts withheld from IRA distributions are considered paid throughout the year, even if they are made in a lump sum at year-end.” If this OK with the IRS, or they definitely want to be paid every quarter via Estimated Tax Payments?
Also, if this workaround can be done with an IRA, does it apply to other retirement plans, like 403(b)s, as well?



Submitted by Alan - IRA critic on Sun, 2019-12-29 16:57

  • Yes, this is completely legal according to the tax code, and could be used with all types of retirement accounts. If the RMD is large enough, this could eliminate any need for quarterly estimates, which are only applied when they are paid. Many IRA distribution processing systems max out the withholding % at 2 digits, which would be 99%. This strategy is being done by many RMD recipients without any IRS objection.
  • It is likewise permissable to take a non RMD distribution at year end with 99% withholding, and complete a 60 day rollover in February using other funds, but this rollover is subject to the one rollover limit per 12 months. For this one, I don’t think it would be wise to do repeat this every year.

  

Submitted by Chuck 2009x on Tue, 2019-12-31 14:13

A lot of people who are taking RMDs and have the money in a brokerage and own stocks that pay dividends will: 1) withdraw the accumulated cash dividends periodically throughout the year as they need them (this counts towards the RMD), 2) Wait until the end of the year to sell shares in order to meet the remainder of the RMD.  Waiting until the end of the year to sell shares permits those shares to earn dividends as long as possible.  However, it’s a bit of a crapshoot – 2018 was an example where this would have been a disaster, since the S&P dropped 20% between October and the end of the year.  

Submitted by Alan - IRA critic on Tue, 2019-12-31 14:35

Another strategy for those doing LSDs for NUA purposes is to defer the first RMD to year 2, then before 4/1 distribute the employer shares to a taxable brokerage. Both the cost basis and the NUA are usually enough to cover the RMD for both years. Then complete the rest of the LSD by year end. 

Add new comment

Log in or register to post comments