But it does give one something to consider and think about.

Re. RMD amount based on brokered CDs, at year’s end

Two Questions:

2023 is the first time I have ever bought brokered CDs. I have been buying short term, 3-6 months. All but one of those have already come due and paid the interest during this calendar year.

But now I have one (possibly soon to be more) that will not pay the interest until 2024. I know that the interest on brokered CDs does not compound. I also know that the amount originally invested in the CD fluctuates along the way — which makes no difference if held to term.

But what I do not know is — how is the year-end value of a brokered CD figured into an IRA for the calculation of the RMD? Original invested amount? Or amount on 12/31?

That range in value will be relatively moot. I am just curious about that part, but the bigger question is about the interest???………

Somewhere along the line, I picked up that the interest on a brokered CD (even if not yet paid in a calendar year due to no compounding) is somehow included in the amount on 12/31, whether it be for the RMD or as interest income from a taxable account. Am I understanding that correctly? Is interest projected somehow even though it has not yet been received, but cannot be thrown over into then next tax year? How does that work?

Boomer

PS: Before the snarky unhelpful types pile on and imply that I am stupid for asking a question like this on TOTV and should ask an accountant — save it. Go read a different thread if you do not like this kind of discussion. I do.

Your IRA custodian will determine the value of your IRA, including brokered CDs, on December 31. As I understand it, this will include the market value of the CDs (not what you invested) and any accrued interest that would be taxable income if it were not in an IRA.

These can be interesting and educational discussions and I like having them here

Me, too, Stu. :)

Boomer

Types
 

Same. Where is the list of these types compiled? :-)

Thank you. . .that brings me to another question, or two:

So, am I understanding correctly that the operative words there are “accrued” and “would be”……..

Does that then mean that the brokered CD’s interest is projected and taxable (or figured into next year’s RMD amount) though not paid out in the current tax year? (Kind of phantom-like?)

Actually, the CD I have is in an IRA. It will not reach its term until 2024 when it will pay the interest to me — no compounding along the way, I know. BUT……..

It sounds like “accrued” interest will apply inside an IRA, too; therefore, having an effect on next year’s RMD. Is that how it works?

If so, how is the accrued interest figured? Does an interest amount just show up on 12/31, even though it is not accessible to the CD holder yet?

I am brand new to brokered CDs. I obviously need a little fine-tuning on the subject.

Boomer

I am only about 99 percent certain, but CDs generate taxable income every tax year regardless of whether or not the interest is actually paid to the owner. The earned, but not paid, interest is included in the December 31 valuation of your total IRA, and that is the amount used to calculate your RMD for the following year. Note that, with a brokered CD, you can sell it at any time at the current value, and you will not lose any accrued interest up to the date of the sale. Some people have stocks, gold, and even real estate in their IRAs, but the RMD is still calculated on the market value of the IRA assets as of the end of the year. The RMD is always calculated on the market value of the IRA assets on December 31. And, unless you have a self-directed IRA, you have an IRA custodian, who is responsible for determining the market value of your IRA assets, and reporting it to the IRS.

Having said this think there are times you get very conflicting opinions and best to consult a tax professional.

In the meantime keep them coming.

In my ignore list...

I'm a CPA and here's my answers:

First one easy question - on CD's outside of retirement accounts interest is taxable when paid (not as it is accrued). The taxpayer has to have constructive receipt (be able to get their hands on the money to be taxable).

As to whether accrued interest on a CD is added to market value in a retirement plan used as a basis for calculating. The answer would be appear to be yes after doing research though I cannot find any specific reference to it in the code or regs.

As indicates before a minor problem as this increase in market value due to accrued interest would be divided by the holder over their life expectancy.

A reminder - start doing the work for your 2023 Qualified Charitable Donations now - if you qualify. A wonderful way to reduce income for both income taxes and IRMMA.

With regards to your first paragraph regarding CDs outside of an IRA, as I understand it, you can always withdraw accrued interest without penalty. And, you are taxed on accrued interest on an annual basis regardless of the term of the CD, or whether or not you actually withdrew the interest. I have owned a lot of CDs, and have always received a 1099-INT every year from the bank and paid income taxes on the accrued interest even when I didn't actually withdraw any interest.

Looking for advice regarding RMD‘s on IRAs, and approaching that age where you have to start taking money out And possible tax consequences

Flat tax. Everyone pays

rg123,

I have owned CDs over the years, too, but they were always regular bank CDs that compounded, making the interest available to take when it posted throughout the term, and that interest was taxable, outside of IRAs. I understand all that.

But — this is the first time I have ever owned brokered CDs, and somewhere I picked up the idea (I think on TOTV) that interest on a brokered CD, inside an IRA, would become a factor in the RMD calculation even though it was not compounding and had not yet been posted. And outside an IRA, the brokered CD interest that had not yet been posted could somehow be taxed……..

Two differences in a brokered CD and a regular CD are the fluctuating value of the brokered CD before term and a lump sum paid at the end of the brokered CD’s term instead of compounding. Those two things — I understand…….

BUT now…..I am starting to wonder if the concern I have about possible consequences of brokered CD interest BEFORE being posted was a complete misunderstanding on my part……Or was it? (It never made sense to me or seemed fair that way, but I have never had any reason to expect tax law to make sense or to be fair.)

Looks like maybe my question was much ado about nothing — maybe.

Boomer

It's taxable when the interest is actually credited to you account even if there are restrictions on the CD - not on an accrued basis.

Thanks. Years ago, I had a zero coupon bond that never credited any interest. But, I still had to pay income tax on the "imputed" or "phantom" interest every tax year. Isn't that the same way a long term bank CD works? I thought that, even if the bank doesn't actually credit interest to your account, the IRS still wants to tax you on interest every year.

Hey, Haggar, thanks,

I am into QCDs. In fact, I tell friends about them, before their eyes begin to glaze over, as they start to look furtively for an exit.

I think it was 2015, not sure, when QCDs were made permanent in the tax law instead of having to wait until late in the year to find out if QCDs would be a thing in each given year. But I was not old enough yet then to worry about RMDs.

When the 2017 tax law changes came into play, the old charitable deduction could not help much anymore for a lot of taxpayers but if RMD age, the QCD could work even better — and it fortunately was already in the tax law and somehow escaped being taken out in 2017.

It is good that the QCD can also avoid IRMAA for those who are charitably inclined and/or would rather give money to charity than to the government for higher Medicare costs. But numbers, of course, will vary by returns and inclinations.

Btw, the reason I have been sounding a bit obsessed with tax questions is because November is when I try to project numbers to see if anything needs to be or can be adjusted. (Yes. I am a boring woman. :) )

Boomer

Note that another difference with brokered CDs is that there is no penalty for early withdrawal of principal.

But I think that means that because the interest is paid at the end of the term, in total, there is no interest upon early withdrawal, even though there is no penalty.

I have yet to do anything over 3 or 6 months. Lately, I saw that it’s hitting more above 5% in available new CDs and I am getting ready to buy again.

Still though……..weird and scary times we are in……..

I realize Fidelity’s money market is grazing 5 sometimes, but I think they collect basis points. Is that right?

Boomer

I don't know how the interest is paid on a brokered CD, but I assume that the market price, if you sell it before maturity, would reflect the value of any future interest payments that will be due. With a bank CD, you never pay a penalty on the interest you withdraw. The penalty only applies to the early withdrawal of principal. You can ask the bank to allow you to withdraw interest only to avoid paying a penalty.

Note that the Vanguard Federal money market fund current yield is 5.31 percent. The Fidelity Federal money market fund has a current yield of 5.02 percent. I think that advertised yields are calculated after any fees have been applied. I always buy the "Federal" money market funds because they pay a slightly higher interest rate than the regular MM fund.

Looks like the official IRMAA brackets for 2024 have now appeared online.

Yes. I know that those are based on the 2022 MAGI, but, at least, those numbers can act as a gauge to get an idea about 2025 brackets that will be based on NOW!

If you find yourself teetering on the threshold of crossing over into IRMAA and you have reached RMD age but have not yet completed the RMD for 2023, it might be worth running some numbers to see if a QCD could rescue you. . . if giving to charity is more appealing than paying taxes and you do the math to see what works best for you.

I think the IRMAA brackets seem unfair to single filers because probably more of them hit that threshold. I also know that IRMAA can sneak up on those who never thought about what could happen if income has been unusually high in a certain year.

Anyway, if IRMAA could be an issue for you, well. . . time’s a wastin’.

Boomer