Required Minimum Distribution (RMD)

[Bali Hai Again]

What is the name of your state? New York

Hello, I went back to the beginning of 2019 looking for information regarding RMD's and can't find anything.

My understanding is that the RMD due is based on the value of the (IRA, 401k, 403b, etc.) account(s) at midnight of December 31st of the tax year. The RMD must be taken prior to that date is my understanding.

It appears that one must guess what the account(s) will be worth on December 31st and take the RMD before that date.

My question is what if someone has 1M dollars in their accounts in growth stocks for instance. They projected what the accounts would be and took slightly more RMD than necessary before December 31st. Then on December 31st it was unanticipated and their account grew by 2% (20k). It turns out that the RMD wasn't sufficient for that tax year. What happens?

 

[LdiJ]

What is the name of your state? New York

Hello, I went back to the beginning of 2019 looking for information regarding RMD's and can't find anything.

My understanding is that the RMD due is based on the value of the (IRA, 401k, 403b, etc.) account(s) at midnight of December 31st of the tax year. The RMD must be taken prior to that date is my understanding.

It appears that one must guess what the account(s) will be worth on December 31st and take the RMD before that date.

My question is what if someone has 1M dollars in their accounts in growth stocks for instance. They projected what the accounts would be and took slightly more RMD than necessary before December 31st. Then on December 31st it was unanticipated and their account grew by 2% (20k). It turns out that the RMD wasn't sufficient for that tax year. What happens?

That is inaccurate Bali. You take your December 31st balance for the prior year, to determine your RMD for the next year. So, for 2022 an RMD would be calculated based on the December 31st, 2021 balance. There is no guesswork involved.

 

[Bali Hai Again]

That is inaccurate Bali. You take your December 31st balance for the prior year, to determine your RMD for the next year. So, for 2022 an RMD would be calculated based on the December 31st, 2021 balance. There is no guesswork involved.

That's great news! It wasn't clear to me even reading tons of material on the subject! Thank you for clearing that up LdiJ!

 

[LdiJ]

That's great news! It wasn't clear to me even reading tons of material on the subject! Thank you for clearing that up LdiJ!

You are welcome.

 

[Bali Hai Again]

You are welcome.

For further clarification: A person reaches 72 years of age in 2023 and is now subject to RMD. Which of the following is correct:

1. December 31, 2023 is used to calculate the RMD and must be taken in tax year 2024?
2. December 31, 2022 is used to calculate the RMD and must be taken in tax year 2023?

Thank you!

 

[LdiJ]

For further clarification: A person reaches 72 years of age in 2023 and is now subject to RMD. Which of the following is correct:

1. December 31, 2023 is used to calculate the RMD and must be taken in tax year 2024?
2. December 31, 2022 is used to calculate the RMD and must be taken in tax year 2023?

Thank you!

December 31, 2022 is used to calculate the RMD and must be taken by April 1, 2024. (You get the extension until April of the following year for your first RMD only, 2024 RMD will also have to be taken in 2024)

 

[Bali Hai Again]

December 31, 2022 is used to calculate the RMD and must be taken by April 1, 2024. (You get the extension until April of the following year for your first RMD only, 2024 RMD will also have to be taken in 2024)

Got it! Thank you LdiJ!

 

[Bali Hai Again]

Got it! Thank you LdiJ!

Further clarification: A person takes their RMD lump sum in December just prior to Dec. 31 as required. When taking the distribution they did not have any tax withheld. Let's suppose the tax owed on the RMD is substantial ($5000). Can the tax owed be paid the following April without penalty? Or would the IRS say that you knew you had to take this RMD and you should have made estimated tax payments during the tax year and therefore a penalty applies?

I really appreciate the help I've been receiving.

 

[Taxing Matters]

It turns out that the RMD wasn't sufficient for that tax year. What happens?

I agree with LdiJ, but I'll answer the question above that hasn't been addressed. If you don't meet your RMD for a given year the IRS will impose a tax (commonly known as a penalty) for that. IRS publication 590-B discusses this for IRAs, and publication 575 for other qualified plans.

 

[LdiJ]

Further clarification: A person takes their RMD lump sum in December just prior to Dec. 31 as required. When taking the distribution they did not have any tax withheld. Let's suppose the tax owed on the RMD is substantial ($5000). Can the tax owed be paid the following April without penalty? Or would the IRS say that you knew you had to take this RMD and you should have made estimated tax payments during the tax year and therefore a penalty applies?

I really appreciate the help I've been receiving.

If you don't have any withholding and you don't pay any estimated taxes then yes, you are going to be hit with an underwithholding penalty. It is not going to be high, but it could be a few hundred. Personally, I recommend that you have withholding.

You also need to watch for the impact that the RMD might have on the taxability of your Social Security Benefits. That trips people up sometimes. The simplistic formula for a single person is 1/2 of your social security benefits plus all of the rest of your income (including the RMD) must be less than $25,000 or your SS benefits start to become partially taxable. It phases up to about $34,000 where the maximum of 85% of your SS benefits become taxable income. If the RMD will put you over either limit, then you need to consider having federal taxes withheld from your SS benefits as well.

A tax professional can take your actual figures and project it out for you to see exactly where you would stand.

 

[Bali Hai Again]

If you don't have any withholding and you don't pay any estimated taxes then yes, you are going to be hit with an underwithholding penalty. It is not going to be high, but it could be a few hundred. Personally, I recommend that you have withholding.

You also need to watch for the impact that the RMD might have on the taxability of your Social Security Benefits. That trips people up sometimes. The simplistic formula for a single person is 1/2 of your social security benefits plus all of the rest of your income (including the RMD) must be less than $25,000 or your SS benefits start to become partially taxable. It phases up to about $34,000 where the maximum of 85% of your SS benefits become taxable income. If the RMD will put you over either limit, then you need to consider having federal taxes withheld from your SS benefits as well.

A tax professional can take your actual figures and project it out for you to see exactly where you would stand.

Thank you for your reply LdiJ! You have been very helpful!

I am seeking to get a general idea of what things might be explored to hold onto one’s money before turning it over to the government as close to the last minute as possible without penalty. I realize that paying a tax professional would be the most efficient way to do that. However, I’m the type of individual that wants to proactively know as much as possible about a subject as I can before I hire an expert and put the situation into someone else’s hands. My research along with the responses I get here will help educate me to the extent possible in that endeavor.

A simple hypothetical situation with fictitious numbers below. I hope you don’t mind me asking these questions and I do appreciate any input from you.

Married filing jointly, no children or other dependents, standard deduction and no other deductions.
The only income is RMD 65k. Annual SS benefits 35k received monthly, no lump sum.
Zero federal tax was withheld from SS. My understanding if there were no RMD there would be zero SS tax.
RMD taken just prior to December 31st. Zero estimated tax was paid during the year.
As I understand it at that point 85% of SS would be taxed along with RMD.

My question: Upon receiving the RMD just prior to December 31st can the full amount of taxes owed (SS and RMD) be paid (maybe from RMD) just prior to December 31st without IRS penalty?

Thanks again for your help!

 

[Taxing Matters]

My question: Upon receiving the RMD just prior to December 31st can the full amount of taxes owed (SS and RMD) be paid (maybe from RMD) just prior to December 31st without IRS penalty?

If that is your only income then you could make the estimated tax payment to cover what you owe by January 15 of the next year and not incur a penalty.

 

[Bali Hai Again]

If that is your only income then you could make the estimated tax payment to cover what you owe by January 15 of the next year and not incur a penalty.

Thank you Taxing Matters!

 

[Bali Hai Again]

If that is your only income then you could make the estimated tax payment to cover what you owe by January 15 of the next year and not incur a penalty.

I hope people don’t mind but I have another hypothetical scenario below that is in conjunction with my previous hypothetical situation.

My question: After reading the below scenario would that change Taxing Matters above response and if so how?

I really appreciate everyone’s input. Thank you!

John Doe turns 72 in 2023. John works the first two months of tax year 2023 and earns a total of 20k. After paying the required SS, Medicare and other pretax obligations, John has his employer put the remainder of his earnings into his 403b account. His net earnings are zero. John has other taxable earnings taken from his paychecks. There is a small amount of Federal and State taxable wages (1.5k) after the two months and zero withheld. John puts that 1.5k into his IRA for tax year 2023. John then immediately retires and does not have any employment related income for the remainder of 2023.

Note: John’s employer’s 403b plan exempts him from the RMD as long as he is still working albeit just two months in the year he turns 72. Would that partially exempt him from the RMD?

 

[Taxing Matters]

I'm sorry, but I'm not inclined to run out endless hypotheticals for you. I refer you to the two publications I linked earlier for the rules concerning IRA and qualified plan distributions. If you need more than that, perhaps you should see a tax professional for advice on how to manage your retirement plans.