Extremely ignorant question about mandatory IRA withdrawals

Factual Questions
21

The argument amounts to …

There is almost no upside to owning multiple IRAs. There’s just complexity without benefit. Whatever entity is managing your various IRAs, one is best. Close the rest and move your money to the good one.

The logic for 401ks for retired people is the same; more than one is just complexity without benefit. And in fact closing your one 401k into your one IRA is even simpler, net of the loss of the creditor protection so ably explained by @Tamerlane just above.

For someone still working (that’s you) they can’t avoid having a current 401k with their current employer. And they’re stuck with whatever provider that employer picked; good or bad. If it’s a good provider, there’s no upside, only complexity, to maintaining old 401ks elsewhere. Better to roll them into this one. If this one sucks, then better to roll all your others into the best one of the bunch. Again, “diversification” of brokerages / 401k management companies is not useful in any way.

In fact, for someone in your expected shoes (planning to still be working while old enough to be generally subject to RMDs) who did have 401ks from prior employers, those would be subject to RMDs. Unless you rolled that money into the plan where you’re still working. In which case it’s shielded from RMDs until you stop working for that employer. Somebody could job-hop to age infinity repeatedly rolling their 401k into their new employer and avoiding RMDs forever. Until the Grim Reaper catches up to them.

And once fully retired for good, other than the liability / bankruptcy shield, there’s no reason to maintains one IRA and one 401k. Simpler to roll the 401k into the IRA and have just one IRA and zero 401ks. Simplicity is good as we slide into dotage. Complexity is bad. It’s not any deeper than that.

I do not understand this question / point. I fear we’re failing to communicate. My fault.

Once you’re old enough to need to do IRA RMDs, you compute your IRA RMD based on the IRS age table times your total IRA balance of all your IRA(s) combined. Then withdraw that total from any combo of one, some, or all of your IRAs. e.g. if you have two IRAs, one with $5K and one with $10K, total that up to get $15K. Then multiply that $15K total by your RMD age factor, call it 4% for the first year, to get $600 for your IRA RMD. Then pull $600 all out of one IRA account or all out of the other or pull e.g. $100 out of one and $500 out of the other. You can choose any combo you want for any reason sensible or silly. The IRS only cares about the total IRA withdrawal(s), not how they’re distributed amongst your IRA(s).

401Ks are different, in that the RMDs are per-account, not per the total. So assuming the same scenario … Assume you have two 401ks, one with $5K and one with $10K. The 401k RMD factor based on your age is exactly the same as the IRA factor: 4%. But …

First you multiple 4% times the $5K balance in your first 401k giving $200. And you must withdraw $200 from that account and no other. Then you multiply the same 4% factor times the $10K balance in the other 401k, giving $400. You must withdraw $400 from that second 401k and no other.

For the same $15K total in IRA or 401K the aggregate RMDs will be the same each year: $600 in our example. What differs is solely how that $600 may be, or must be, distributed between your multiple IRAs or 401ks.

Make sense? Have I been responsive or did I misunderstand your point?

Reminder: 100% of this discussion is ignoring ROTH accounts which have no RMDs.

22

If you are between 55 and 59.5, only your most recent 401k is available for the Rule of 55 and funds are able to be disbursed without penalty (but they are taxed as income). I retired at 56 and didn’t mix them all into an IRA until I was 59.5.

23

One advantage of rolling a 401K into an IRA is that you can put the money in any mix of investments you want, not just the ones offered by the manager of the 401K.

The RMD for each tax year is based on the value of the IRA at the end of the preceding year. It’s a good idea to note the closing value of your IRA at the end of December 31 so you can make this calculation.

24

I misunderstood this:

The calculations are the same but with IRAs it can pooled, while 401Ks have to be within each account.

And I misunderstood that I thought you were saying there was an argument for having one of each after retirement. You are not. Instead keep just one. (For me that will be the 401K.)

25

You can’t combine an IRA into a 401K. So if you have any IRA(s), you’re stuck with at least one of them unto death or withdrawal down to zero. Which withdrawal you’re free to do any time after age 59-1/2. Admittedly with the tax consequence of the entire withdrawal being ordinary taxable income in the tax year(s) you do it.

Clearly through your current job you have the current 401K and might have earlier one(s) from earlier job(s).

My argument was simply that all IRAs ought be combined into one IRA no matter what. And all 401ks ought be combined into one 401k no matter what. And upon actual final retirement from paid W2 employment, the one remaining 401k ought (but optionally) be combined into the one remaining IRA. Leaving just one IRA to rule them all. IMO YMMV.

26

Is it permitted to ADD money to an IRA after an RMD has been triggered? If the OP doesn’t feel the need to access the money right now, they could withdraw from each account, deduct the taxman’s share, and re-deposit the funds, right?

ETA: I feel that RMD should be RMW (Required Minimum Withdrawal), but okay.

27

You can only add funds to an IRA up to the lesser of a) the limits that year (2026: 7500 basic plus 1100 catchup for somebody of RMD age = 8600 total) and b) the amount of your taxable W2 income.

So if you’re e.g. 73 and still working at a job for enough wages, you can take your RMD and also deposit funds into your IRA. The amount of the required distribution and the allowed deposit are unrelated. They might be similar or they might be wildly different in either direction.

FYI in pension law, payouts are always “distributions”. IRAs were the first baby step by Congress towards people having control of, and responsibility for, their own retirement. So they stuck with the then-existing terminology.