Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMD) are, as the name indicates, minimum annual distributions that must be withdrawn from an IRA beginning with the tax year in which the account holder turns 72. As part of the SECURE ACT, passed in late 2019, the starting age for RMDs was increased from 70½ to 72. The IRS requires these annual distributions to help ensure that account holders don’t simply continue to accumulate money in retirement accounts, thereby deferring taxation, forever (except in 2020 when the CARES Act eliminated RMDs for that year). Uncle Sam wants his cut (read: tax revenue) of the growth in your IRA!
The RMD is calculated in January of each year and is based on the account value as of the last day of the prior year and the account holder’s life expectancy per an IRS-provided table. For example, the Life Expectancy Factor from the IRS Uniform Life Table for a 72 year old is 25.6 years and that number would be divided through the December 31 account value to determine the current year’s RMD. Schwab provides Yeske Buie with a report containing all RMD amounts for our clients for that year in mid-to-late January. Once we receive this report, we ensure it includes all RMD accounts – including first year RMDs for clients who recently reached or will reach age 72 before year’s end – then we jump into action.
First, the Associate Financial Planners (AFPs) review all client accounts subject to RMDs to determine: the amount of dividends and capital gains distributions credited to the account in December of the preceding year, the RMD amount, any planned spending in the coming year, and the current cash balance in the account. If necessary, the AFPs will then place trades to raise the cash balance to the necessary amount for review and approval by the Senior Financial Planners.
The AFPs then determine whether a client will be making any Qualified Charitable Distributions (QCDs) from their IRA in that year. QCDs are an appealing way to give to charity for those with donative intent who do not otherwise itemize their deductions. This has become more popular recently given changes to the tax laws limiting State and Local Tax (SALT) deductions to $10,000 and increasing in the Standard Deduction (in 2021: $25,100 for clients Married Filing Joint; $12,550 for Clients filing Single; $18,800 for Head of Household; additional $1,350 for each person blind or over 65 ($1,700 if unmarried and not a surviving spouse).
QCDs count towards the annual RMD but are not taxable distributions from an IRA. So, for clients who give to charity but would receive no direct tax return benefit from the donations (due to that higher standard deduction), they can reduce their otherwise-required taxable income by using part of their RMD to give directly to charity.
If QCDs are expected (generally discussed at each Annual Update meeting so the AFPs have reminders set for the following year RMD timeframe), the team will reach out to the Client to determine the appropriate cash to set aside in that year for QCDs then process the remaining RMD as described below.
Once the cash is raised and the amount to set aside for QCDs is determined (if applicable), the RMD is distributed in one of three ways (taxes can be withheld from these distributions, or not; it’s not a requirement), according to client preference and spending pattern:
- If the client would like the RMD distributed to his/her taxable brokerage account to be used for annual Safe-Spending, the RMD is transferred in one lump sum.
- The RMD can also be transferred in one lump sum to a checking account for the client’s use throughout the year.
- If the client would, instead, prefer to receive monthly distributions to a brokerage or checking account, a recurring, monthly MoneyLink transfer will be set up.
As client RMDs are distributed in the early part of the year (and throughout the year for monthly distributions), the AFPs update the Yeske Buie internal tracking mechanism. Because RMDs must be distributed prior to the end of each year, we carefully track the status of each RMD each year.
In November, the Yeske Buie team reviews the list of all client accounts with RMDs again. This time, to ensure that: the RMD was distributed early in the year; the RMD has been finished after all QCDs have been distributed; or that the client’s regular spending has (or will by December 31st) satisfied the year’s RMD. If, for whatever reason, additional withdrawals need to be made to satisfy a client’s RMD, the client will be contacted by his/her AFP in order to do so.
It’s important to note three things:
- RMDs cannot be converted to a Roth IRA
- You can withdraw more than the RMD amount if needed or if provided by your Annual Safe-Spending Target
- Roth IRAs are not subject to RMDs
We have the RMD report from Schwab and we have begun the process described above. Please don’t hesitate to contact us if you have any questions about RMDs.