Author: SmileIfYouDare

“Timing Is Everything,” goes a common saying. Let’s take a look at a timing problem provided by the U.S. Tax System.

We all know about April 15 (or so) being the usual deadline to file taxes for the previous calendar year. And how filing an extension can extend that until October 15 (or so).

But there are numerous other dates one must be aware of. For this post, let’s look at taking RMD distributions (withdrawals) from deferred accounts such as IRAs. Aside from the first year, the deadline to take an RMD is December 31 based on the closing value of deferred accounts on December 31 of the previous year.

In describing this issue, I will use most recent years (2021, 2022, 2023) but it can be applied to any set of three consecutive years. The description requires three years, Let’s start at 2021.

December 31, 2021 = value of deferred accounts from which RMD amount is calculated

Sometime between January 1 and December 31, 2022 = when must withdraw the RMD amount based on the December 31, 2021 amount.

April 15, 2023 = deadline for filing taxes for the 2022 tax year. The income for 2022 includes RMD withdrawals done in 2022 based on the deferred account balances at December 31, 2021.

So what’s the problem?

For the balance in deferred accounts as of December 31, 2021, one must withdraw the RMD amount before December 31, 2022. There is a minimum amount one must withdraw, which is based on one’s age, per an IRS calculation.

If one wanted to withdraw more than the minimum but not so much to trigger being put into a high tax bracket, then there is no exact way to actually determine how much to withdraw. One must guess.

One must guess because one will not know one’s true tax situation until early 2023 when starting to fill out one’s 2022 tax return. But by that time, the withdrawal deadline of December 31, 2022 has passed.

Of course, the prudent will say “estimate your income and taxes for 2022” before the end of 2022. This is logical, and estimate is only as far as one can get. And it can be difficult. Income could probably be estimated, but determining taxes may not be possible or doable. What is not so simple is understanding the tax calculations for 2022 before the end of 2022. Most if not all tax software available will not have in place all the logic and mechanisms necessary before the end of 2022 regarding what 2022 taxes will be. It is possible that some tax changes for 2022 may occur at the very end of the 2022 calendar year, so software companies are loath to present any credible software before December 31.

As a result, to know what my exact tax situation will be when it come to my desire to prevent my RMD from sliding into a higher tax bracket, I must guess. Guessing leads to unexpected consequences. As a practical matter, I will likely either be lower than desired (withdraw less than I could have), or higher than desired (and thereby be pushed into a higher tax bracket).

As an additional but minor note, most if not all tax software is not set up for running and comparing different scenarios. One would need to manually enter all data, note down results, then go back and change the data by entering a second set of variables, note that down, etc. Tedious and not very productive.

I’ll admit that this all is a first world problem. I calculate my situation based on where I am. And I need to remind myself that the impetus to withdraw additional funds but without ending up in a higher bracket is motivated by a desire to adjust what already is a beneficial condition. The results garnered from what I saved and invested has proven to be, at least so far, a successful outcome. In previous years, my withdrawal amounts for RMDs were sufficient to satisfy the IRS, while leaving me financially in good condition. There is always room for improvement or financial tweaking, but as it is so far, things are turned out to be comfortable, for which I am grateful.

How has RMD timing worked out for you? Let me know here.

The 1924 photograph by Minya Diez-Dührkoop is of “Toboggan Mann” Walter Holdt and his wife “Toboggan Frau” Lavinia Schulz, entitled Tanzmasken (Dance masks). Courtesy Museum für Kunst und Gewerbe (Museum for Art and Trade), Hamburg, Germany.

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