RMD, QCD, CONVERSION, taxes, notifications

Submitted by star pollack on Sat, 2017-12-09 20:20

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A HUGE THANK YOU TO ALAN AND OTHER EXPERTS WHOSE KNOWLEDGE AND GENEROSITY OF SPIRIT IS PRICELESS TO THIS SINGLE RETIREE GRANDMOTHER. I HAVE COME A LONG WAY SINCE OCT. 25
1. I MAY DO A LARGE ROTH CONVERSION THIS MONTH. I THOUGHT TAXES ON THE CONVERSION WOULD BE DUE AS PART OF MY FILING INCOME TAXES FOR 2017 (APRIL 2018). I RECENTLY READ THAT A LARGE CONVERSION COULD RESULT IN THE REQUIREMENT THAT I PAY ESTIMATED TAX ON THE CONVERSION BEFORE APRIL 2018. PLEASE COMMENT

2. WOULD I NEED TO NOTIFY IRS IF I AM NOT TAKING (MY FIRST) RMD IN 2018, BUT WILL TAKE TWO IN 2019? IF SO, HOW DO I DO THIS? DO I ALSO NOTIFY VANGUARD AND OTHER ACCOUNT CUSTODIAN?

3. WHAT IS THE EFFECT ON 403(b) RMD OF AN OUTSTANDING 403(b) LOAN?

4. WHAT IS THE SPECIFIC TIMING AND METHOD OF DOING A QCD AS PART OF AN RMD?
DO I SIMPLY NOTIFY VANGUARD I WANT TO DO A QCD AS PART OF MY RMD AND TELL THEM WHEN?
A. I KNOW THE REQUIREMENTS FOR RMD DEADLINES AND TO DO QCD AFTER 70.5
B. I KNOW QCD WOULD NOT BE DONE IN ADVANCE- WOULD TRIGGER RMD BEFORE MY CHOSEN TIME
C. I KNOW I CANNOT DO RMD AND COME BACK AT A LATER TIME IN THE YEAR FOR THE QCD

5. A.WHY DO SOME PEOPLE TAKE MONTHLY RMDs?* FOR EXAMPLE—You might also consider spacing your distributions throughout the calendar year rather than taking a lump sum at year-end and by doing so obtain a range of sale prices for your longer-term assets. ANYTHING ELSE?
B. *IF I SPACE MY DISTRIBUTIONS THROUGHOUT THE YEAR, SHOULD I DO QCD AS PART OF FIRST DISTRIBUTION?

6. IN 28% BRACKET, IS LEAVING FUNDS IN 403(b) << & WOULD DO ORDINARY CHARITABLE DONATION FROM PENSION>>…MORE VALUABLE THAN A $1,000 YEARLY QCD, IF FUNDS FOR THE TIRA & QCD FROM THAT TIRA ARE BEING ROLLED OVER FROM 403(b) EACH YEAR? I CAN’T DO THIS MATH- IS THE COMPOUNDING MORE VALUABLE THAN A YEARLY SUBTRACTION OF $1,000?



Submitted by Alan - IRA critic on Sun, 2017-12-10 17:57

  1. Be careful with this conversion because the pending tax bill might not allow any recharacterizations after 2017, so this conversion could be permanent. As for payments, if you meet the usual safe harbor of having paid in 100% of your 2016 tax liability, you will not be penalized no matter how much you owe in April. Otherwise, you may either want to pay an additional estimate by 1/15 or withhold from the conversion itself. If you pay an estimate, then you probably will have to file the complex 2210 annualized income installment method to prevent a penalty on the first 3 quarters. The 2210 will show the date of the conversion, otherwise the IRS does not know WHEN in the year you converted. OR – since this can get quite complex you might just pay the late interest since the interest rates are low if the IRS bills you. 
  2. No need to notify either the IRS or the IRA custodian of delaying the first year RMD, unless you signed up for Vanguard’s automatic RMD service. If you did sign up for that, I would undo this service because you have too many variables in play and if VG does a distribution, they could totally mess up your plans.
  3. No effect from the loan. But if there is a deemed distribution reported on a 1099R (for failure to meet loan requirements), the 1099R amount does NOT count toward your RMD nor does it reduce the plan balance on which your 403b RMD is calculated.
  4. You should do the QCD first if possible, to make sure it is credited toward your RMD. Next you must complete your RMD (for both 2018 and 2019 if you delay the 2018 RMD) and want to convert in 2019 as well as the one in 2017. A conversion can only be done after the RMD for the year of the conversion has been completed, otherwise you are converting some of your RMD which is not allowed. So QCD first, rest of RMD second and conversion last. Note that if you wanted to do a QCD in 2018 but delay the REST of your RMD for 2018 you could do that (after 70.5). The QCD amount would reduce the amount of the RMD you are delaying until 2019, and there would be no taxes due on the IRA distribution in 2018 since it would just be the QCD amount. Re point C – you CAN do a QCD after the RMD, but it will not offset the RMD income and is therefore not recommended.
  5. Some people take monthly RMDs because they think it helps them budget their expenses, or they like to receive the RMD in paycheck style. I would ignore the sales price of assets statement, at least as long as you are doing QCDs and conversions since those would take priority over theoretical sales price considerations. Now, using an example, suppose your RMD was 12,000 (1,000 per month), and you wanted to do a QCD of 3,000. Since the QCD is only going to offset 3,000 of the 12,000 you could do the QCD anytime (Jan – March) or (Oct-Dec) and it will be OK. You have this flexibility because your QCD is far less than the RMD. But if your QCD was the entire RMD, they you would have to start with the first distribution. The actual critical point to understand is that once your take a NON QCD distribution, that amount can never to offset by a later QCD. So if you took out 1,000 for 6 months, that eliminates 6,000 from being offset by your later QCD. In this example since the QCD will only by 3,000, you can delay the QCD until there is only 3,000 left of your RMD if you want to. The smaller your QCD is in relation to the RMD amount, the more flexibility you have in timing.
  6. Probably not more valuable than the 1,000 subtraction.  It would be much simpler if you just rolled the entire 403b in a direct rollover to your IRA. It would simplify use of QCDs and RMD compliance, but perhaps there is another reason you want to maintain the 403b. Usually, the expenses for the 403b investments are considerably higher than Vanguard’s typical low cost index funds, or for that matter Schwabs or Fidelity’s as well.

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