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Tax Strategy for Required Minimum Distribution?

Forum|Forum|4 years ago
November 12, 2021
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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?

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Best answer by Critter-3

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-distributions-rmds

Critter-3Answer

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-distributions-rmds

L

Leocat999Author

awesome! Thank you for the quick reply!

SteamTrain

Employee

@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.

_________________

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

L

Leocat999Author

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

Employee

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