Tax Strategy for Required Minimum Distribution?

[Leocat999]

I am currently 59 years old and have a question about how the RMD works.

When I retire, hopefully by 63, I plan to roll my 401K over into an IRA.  I have a decent amount of investments outside of my 401K, combined with social security,  that should sustain me until 70.

Theoretically, if I have enough money in the IRA in dividend stocks and I'm getting an annual 4% return in dividends, I was thinking I could take the 4% dividend return every year and not have to pay capital gains, never touch the principal, and satisfy the RMD.

Is this accurate on how the RMD works or am I missing something here?  

[Critter-3 · Accepted solution]

When you are 72 you will have to start taking an RMD from the IRA and in theory if you have enough earnings in the account you will not invade the corpus with the RMD distributions.  The IRS dictates the amount you need to take ... see the info  here : https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-di...

[Leocat999]

awesome!  Thank you for the quick reply!

[Critter-3]

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

[SteamTrain]

@Leocat999 

.....and, you should note that the $$ you take out as a distribution in any year, is treated as ordinary cash income and taxed as such using whatever tax rates are in force for the tax year you remove those $$.   The fact that some of it may have been generated as qualified dividends, or LT capital gains "inside" the IRA, is immaterial.

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[Leocat999]

Thank you,

So, is this hypothetical example correct?

Age 72   I have a retirement account value of $1M

I received a 4% dividend yield during the year of $40,000
I receive $25,000 income in Social Security

My gross income for tax purposes would be $40,000 + $25,000 = $65,000 and would be taxed based on the income of $65K.

This would also satisfy the 4% RMD due to the $40K withdrawal?

[VolvoGirl]

Don't think of it as dividends.  The Dividends stay in the account and are not currently taxable.   If you happen to take out the same amount that would be a plain Distribution.  As long as you take out the RMD amount or more.   

And only Up to 85% of Social Security becomes taxable when all your other income plus 1/2 your social security, reaches:

Married Filing Jointly: $32,000

Single or head of household: $25,000

Married Filing Separately: 0

So only 85% of 25,000 = 21,250 would be taxable at most.  

Then you get to subtract the Standard Deduction from your total income to get the Taxable income.  Plus you get an extra amount for being over 65.

For 2021 the standard deduction amounts are:

Single 12,550 + 1,700 for 65 and over or blind (14,250)

HOH 18,800 + 1,700 for 65 and over or blind

Joint 25,100 + 1,350 for each 65 and over or blind

Married filing Separate 12,550 + 1,350 for 65 and over or blind

[Critter-3]

Not quite... the dividend yield has nothing to do with it.  Check the worksheet and the chart.  If you want to take more you can but it would not be required.

At 72 your RMD on an account of $1 million would be 39,062 + 21,250 (85% of 25K) = 60,012

Remember that is just  the gross income ... you still get to deduct the standard or itemized deduction + the exemption amount allowed at that time. 

[SteamTrain]

Don't forget to look at & use the worksheet link Critter posted above.   Right now, a 72-yo would need to take out ~4% as an RMD , but the amount goes up every subsequent year.  (~5% at age 78,  ~10% at age 92...etc)

The table in the referenced worksheet is valid right now for folks needing their RMDs for 2021, but a number of 3rd party public sites are indicating that the IRS has generated a new table for 2022 RMDs (and beyond), that appears to lower the minimums somewhat.....and they may change it again by the time you reach age 72. 

________

 (I haven't found the actual new 2022 IRS table on the IRS's webpage yet...perhaps it's somewhat hidden to prevent accidental use by those still needing to take theirs this year)

[Critter-3]

Correct ... the IRS plans for the RMDs to drain the account in about 25 years but if the account makes more then the RMD every year then it could take much longer.   Sadly the IRS doesn't want to wait forever for the taxes. 

[Leocat999]

Thank you.  It seems like the IRS is going to get their (my) money no matter what, lol.  

[fanfare]

IRS has nothing to do with it.

Congress passes the law,

Now they're getting ready to set it so if you make too much money in wages, you are not allowed to contribute to your IRA, even as non-deductible.

See Pub590-B for your divisor for your age. That and your total value of all IRAs determines how much you must distribute.

You must do the same calculation for your 401k also but separately.

So if you have IRA(s) and  a 401k you must take two RMDs.