The reason I don't want to take it right now is because my IRA is invested in a single stock that has lost 90% of its value over the past 2 yrs ... I am hoping to hold the stock until it rises again enough to get back some of all of my original investment... taking the RMD of $2,756 right now would cost me $23,476 in lost capital ... of course I may NEVER get back my original capital, but the stock has a tendency to RISE every April ... so maybe it is better to "eat" the 50% penalty right now and hopefully in April 2017 take the 2016 RMD at a lesser loss of capital? And then try to explain to the IRS why the distribution was late?
To avoid the 50% excess accumulation penalty, you must make the distribution by December 31, 2016. Intentionally delaying the distribution beyond year-end would not constitute reasonable cause for the IRS to waive the penalty.
You do have the option to simply not take the RMD and to pay the $1,378 penalty.
You could take the distribution as an in-kind distribution, but your cost basis would become the value on the date of distribution and the rebound would be taxed as a capital gain when realized.
If you have multiple traditional IRA accounts, you can satisfy this RMD with a distribution from the other traditional IRA account.
To avoid RMDs going forward and to minimize taxes, you should probably consider converting the traditional IRA to a Roth IRA while the value is temporarily down.
"taking the RMD of $2,756 right now would cost me $23,476 in lost capital" Do you really expect it to rebound that much in a few months? Also keep in mind that, as the value of the IRA increases, so will your future RMD.
"stock has a tendency to RISE every April: Then consider taking your 2017 RMD in April.
To avoid the 50% excess accumulation penalty, you must make the distribution by December 31, 2016. Intentionally delaying the distribution beyond year-end would not constitute reasonable cause for the IRS to waive the penalty.
You do have the option to simply not take the RMD and to pay the $1,378 penalty.
You could take the distribution as an in-kind distribution, but your cost basis would become the value on the date of distribution and the rebound would be taxed as a capital gain when realized.
If you have multiple traditional IRA accounts, you can satisfy this RMD with a distribution from the other traditional IRA account.
To avoid RMDs going forward and to minimize taxes, you should probably consider converting the traditional IRA to a Roth IRA while the value is temporarily down.
"my IRA is invested in a single stock" Good recommendation re Roth conversion!
A complication to doing a Roth conversion is that it can only be done on the remaining balance *after* having satisfied the year's RMD, so it may be impractical. Doing a Roth conversion before the end of 2016 would require first taking the $2,756 RMD. It might be more practical in 2017 when the RMD will probably be only about $286 (if the 2016 RMD is not taken and the penalty is paid), assuming no appreciation between now and the end of 2016.
Just liquidate the entire IRA, and buy the stock back in a traditional brokerage account if you believe it will come back. Then you would get favorable capital gains treatment after twelve months. you could even pay your RMD out of margin loan on a margin account.
fanfare's suggestion may be the most practical. However, I would take the RMD in-kind, then convert the remainder of the traditional IRA to Roth. The appreciation in the stock from the RMD now held in a nonqualified brokerage account would eventually be taxed at capital gains rates instead of as ordinary income from the IRA (or would receive a step-up in basis at your death), while the portion converted to Roth would eventually be entirely tax free once the 5-year Roth qualification period is met (and it may already be met if you have another Roth IRA).
I WISH TO THANK EVERYONE FOR THEIR REMARKS ... since I live on Soc Sec and am 74, I'd better just take the penalty right now and figure out what to do in 2017?
If you take an RMD and buy the stock, the RMD tax is not due until April 18th.
If it was me, I would probably do as I indicated in my comment immediately prior to this one: Take the $2,756 RMD in-kind before the end of 2016, then convert the remainder to Roth before the end of 2016. With Social Security as your only other income, long-term capital gains will be taxed at 0% unless you realize enough in capital gains to begin to increase your marginal tax rate above zero.
"If you take an RMD and buy the stock, the RMD is not due until April 18th."
I'm not sure what you are trying to say. The RMD must be distributed before year-end 2016.
I edited my comment replace "RMD is not due" with "RMD tax is not due".
That's what I thought, but the tax is actually due by January 16, 2017. Only if a safe-harbor underpayment penalty exception is met could the tax payment be delayed until April 18, 2017.
If you're saying make a Q4 Estimated Tax payment on the RMD, I doubt many people taking RMDs would do that. And if he did not, there would probably not be a penalty anyway.
In his situation tax should be zero, with or without the RMD in 2016.
Aren't IRA distributions/conversions taxed at ordinary income rates, not capital gains rates? More of your Social Security may become taxable,. Also remember potentially increased Medicare premiums two years down the road.
<a rel="nofollow" target="_blank" href="https://www.ssa.gov/pubs/EN-05-10536.pdf">https://www.ssa.gov/pubs/EN-05-10536.pdf</a>
At a current value of about $6559 and no other income other than Social Security, neither of these side effects is likely, but should be checked.
How do you know the current value is $6,559? I didn't see it mentioned above. If the RMD is $2756, then the current value would be miore like $65,593.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf">https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf</a>
It's the December 31, 2015 value that was $65,593. I thought that the entire 90% drop in value occurred during 2016, but reading the question again I see that this drop occurred over two years, not one, so my calculation was erroneous. A higher current balance than I thought does make it more likely that distributions from the traditional IRA may need to be limited to avoid possible additional taxation of Social Security benefits and increase in Medicare premiums. The tradeoffs are difficult to model.
I agree. OP also says "taking the RMD of $2,756 right now would cost me $23,476 in lost capital "
That's based on the assumption that the stock valued at $2,756 now will appreciate by about 850%. That whole portion of the discussion is probably moot, though, since the distribution can be made in-kind and any appreciation can still be realized. As fanfare suggested, if distributed in-kind and subsequently held for more than a year, the $23,476 of appreciation would eventually be taxed as a long-term capital-gain instead of as ordinary income. Paying tax on $23,476 of LTCG will likely save at least 10% over having it taxed as ordinary income. Regardless of which way the $23,476 is realized, it will have the same effect on the cost of Medicare premiums and the taxability of Social Security.
This situation illustrates the hazards of investing an entire retirement account in a single stock. A 90% loss would have been a near impossibility with a more diversified portfolio.
Living, as stated, on Social Security only, an RMD of 2,756 is not enough to trigger taxation.
Therefore the entire RMD can be reinvested into the stock, if that is what is desired.
Please let us know what stock goes up in April, so we can get some!