Reinvesting most of this year's RMD

[Stan Brown]

I have a taxable account and a traditional IRA at Vanguard. Both have
index funds in Vanguard ETFs. For ease of discussion, let's say my
RMD is $20,000 but I need only $4,000 of that for living expenses.

I'm planning to sell $20,000 worth in the traditional IRA, transfer
$4,000 of proceeds to my bank and the other $16,000 to the taxable
account, and then buy shares of the same ETFs I sold in the IRA. In
this way I'll avoid locking in most of this year's losses in fund
values. Of course the whole $20,000 will be declared as ordinary
income on my 2022 return.

Question 1: Are there any tax pitfalls to this strategy? (I don't
think this would be a wash sale, since the capital loss will be in
the IRA and therefore I couldn't get any tax benefit from it anyway.
But please correct me if I'm wrong, or if I could be creating some
other tax problem.)

Question 2: My basis in the new shares purchased in the taxable
account will be that day's price, not original cost when I bought
them in the IRA, right?

Question 3: I'd prefer to transfer the $16,000 to my Roth, but I
don't expect any earned income this year. With no earned income I
can't put that traditional IRA money into the Roth, right?

Thanks!


--
Stan Brown, Tehachapi, California, USA https://BrownMath.com/
Shikata ga nai...

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>

[ira smilovitz]

An easier method would be to transfer the $20,000 of ETFs directly to the taxable account (distribution in kind) and then sell $4,000 for your living expenses.

You can't *contribute* to a Roth IRA (or any IRA) without compensation income for the year. You could convert some of your traditional IRA to a Roth IRA, reporting the conversion as additional income and paying the tax on the conversion. A conversion can only take place after you have taken your RMD for the year.

Ira Smilovitz, EA
Leonia, NJ

[Stan Brown]

On Mon, 12 Sep 2022 15:51:25 EDT, ira smilovitz wrote:
>
> On Monday, September 12, 2022 at 12:28:00 PM UTC-4, Stan Brown wrote:
> > I have a taxable account and a traditional IRA at Vanguard. Both have
> > index funds in Vanguard ETFs. For ease of discussion, let's say my
> > RMD is $20,000 but I need only $4,000 of that for living expenses.
> >
> > I'm planning to sell $20,000 worth in the traditional IRA, transfer
> > $4,000 of proceeds to my bank and the other $16,000 to the taxable
> > account, and then buy shares of the same ETFs I sold in the IRA. In
> > this way I'll avoid locking in most of this year's losses in fund
> > values. Of course the whole $20,000 will be declared as ordinary
> > income on my 2022 return.
>

> An easier method would be to transfer the $20,000 of ETFs directly to the taxable account (distribution in kind) and then sell $4,000 for your living expenses.

Thanks for replying, Ian. I've been trying to find out whether
Vanguard offers that option -- their telephone support has
deteriorated severely in the past months -- but the bottom line is
that they do not. They support contributions in kind, but not
distributions in kind.

Just to confirm: if I sell shares in my traditional IRA, then move
the cash to my taxable account and use it to buy shares in the same
funds, I don't have any issue with the wash-sale rule, right?

And I'm not creating some other tax problem by doing this, right?

--
Stan Brown, Tehachapi, California, USA https://BrownMath.com/
Shikata ga nai...

--

[ira smilovitz]

Either they're giving you wrong information or you are not understanding them. You cannot, by law, make a contribution in kind to a retirement account. You can make a broker-to-broker rollover to a retirement account. I have not heard of any broker that will not do a distribution in-kind from a retirement account to a taxable account except for certain classes of investments that are restricted to retirement accounts (perhaps a special class of mutual fund shares).

If you sell within the IRA, distribute cash, and then buy in the taxable account, you will not have a wash sale because you didn't receive any tax benefit from the loss. Note that if you do this in the opposite direction, sell for a loss in a taxable account and then buy in a retirement account, the loss is lost forever. You cannot claim the loss and there is no effect to adjusting the cost basis within the retirement account.

Ira Smilovitz, EA
Leonia, NJ

[Stan Brown]

On Thu, 29 Sep 2022 17:37:37 EDT, ira smilovitz wrote:

> Either they're giving you wrong information or you are not
> understanding them. You cannot, by law, make a contribution in kind
> to a retirement account. You can make a broker-to-broker rollover
> to a retirement account. I have not heard of any broker that will
> not do a distribution in-kind from a retirement account to a
> taxable account except for certain classes of investments that are
> restricted to retirement accounts (perhaps a special class of mutual
> fund shares).

Thanks, Ira. FWIW Vanguard told me the exact opposite: "you can make
a contribution in kind, but not do a distribution in kind." Maybe I
misunderstood, maybe the rep had a slip of the tongue, but based on
what you said I think I got bad information. Given how many hours it
took to get that answer, I'm not inclined to try again.

> If you sell within the IRA, distribute cash, and then buy in the
> taxable account, you will not have a wash sale because you didn't
> receive any tax benefit from the loss.

I was pretty sure it worked that way, but was _not_ sure I had an
accurate answer from Vanguard. I'm going to cut my losses (of time)
and sell in the IRA, distribute cash, and buy in the taxable account.

> Note that if you do this in the opposite direction, sell for a loss
> in a taxable account and then buy in a retirement account, the loss
> is lost forever. You cannot claim the loss and there is no effect
> to adjusting the cost basis within the retirement account.

A good reminder. When I need to sell from the taxable account, I'll
want to time it more than 30 days before or after any automatic
dividend reinvestment ("DRIP") in the IRA.

--
Stan Brown, Tehachapi, California, USA https://BrownMath.com/
Shikata ga nai...

--