Age 70 ½... Now What?
A Required Minimum Distribution (RMD) is a calculated amount that is required by the IRS to be distributed from your retirement accounts annually once you reach age 70 ½. If you are turning age 70 ½, you have two options. First, you can take the distribution in the year you turn 70 ½. Second, you can wait and take it by April 1st of the following year after turning age 70 ½. This would mean that you would be distributing two years of RMD’s, which could increase your tax bracket because of the extra income. Although some special situations might benefit from this first year exception, it is far more likely that taking the first year’s RMD in the year you turn 70 ½ is more beneficial. It would be wise to consult with your financial advisor or tax professional to make this decision. After the first year, RMDs are required to be taken annually before December 31st.
Are There Late Penalties?
If you miss one of the previously mentioned deadlines for your RMD, there can be penalties. The penalty for a late RMD is typically 50% of the minimum distribution. If you are late on a RMD, make sure to fill out IRS form 5329. This form allows you to state a reason why the distribution was late. If the IRS thinks your excuse is justified, you may be able to avoid the hefty penalty.
When calculating your RMD….
It is important to remember that the calculation of your yearly RMD is based on the value of ALL your retirement accounts at the end of the previous year. Too often individuals forget to aggregate all of their retirement account values when determining their RMD. The reason why this can be important is that you can take the total aggregate RMD from only one account if you wish. Understanding this option gives you the flexibility to make strategic decisions on where and what securities to distribute. Make sure not to include after-tax accounts such as ROTH IRA’s and ROTH 401(k)’s into the calculation.
403(b)’s Are Different!
Although 403(b) (tax sheltered annuities) values are included in the calculation of your RMD, you must distribute the RMD owed from the 403(b) account from the same account. If you have multiple 403(b) accounts, you reserve the ability to choose from which 403(b) accounts to take the RMD. Likewise, non-403(b) RMD values cannot be distributed from a 403(b).
I Hate Selling! Is There An Alternative?
“In kind” transfers are another neat strategy that can be implemented when taking an RMD. You have the ability to take your RMD by transferring a security from a retirement account to a taxable account. Although you will still owe tax on the amount transferred, your security’s new basis is the taxable value on the day of distribution, and can continue to be held without any costs associated with needed sales or purchases.
Can I Make A Charitable Donation With My RMD?
To take the previous idea even a step further, you can directly distribute your RMD to a charity without a check ever reaching your hands. Why is this beneficial? It comes down to whether you itemize or take the standard deduction on your tax return.
Before this rule became permanent in 2015, many individuals would take their RMD as usual, and then subsequently donate the amount to a charity. This would result in the distributed amount being taxable, but the donation counting as an itemized deduction, essentially cancelling the two events out. This strategy works great for individuals using an itemized deduction, but doesn’t do much for individuals who would still benefit from a standard deduction over itemizing. With this rule made permanent in 2015, now an individual can directly donate from their retirement account to charity, dodging the taxability of the distribution, as a substitute to taking an itemized deduction they won’t ever use. The donation must go directly from your retirement account custodian to the qualified charity for this trick to work.
When considering these tips and tricks, speak with a financial advisor to find which strategy best fits your specific situation.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.