Five Things to Know about Required Minimum Distributions
You may not think twice about acknowledging your 70 ½ “birthday” but in fact, this is an important milestone as it marks the time when you must begin taking required minimum distributions (RMD). Your RMD is the mandatory minimum withdrawal you’re subject to distribute from your retirement accounts; the amount is calculated based on your age and account balance. Every year you contributed to your IRA or 401(k), your assets were growing tax-deferred. As such, once you begin taking distributions from these tax-deferred accounts, you must pay the required taxes. To help you feel confident in understanding the considerations associated with RMDs, we share a list of five things to keep in mind before you’re subject to taking the distributions.
- Timing matters
- You may not have anything planned for your 70 ½ birthday but it is an important milestone to acknowledge as it marks the time that you must begin taking you required minimum distributions. While this date marks the beginning of your RMD requirements, you can choose to wait to take your first RMD as late as April 1st of the year after you turn 70 ½, which can be advantageous if you’re expecting lower income in the following year. For example, for those who turned 70 ½ in 2016, it is possible that you could save in taxes by taking your first distribution in 2017 considering the possible tax reform pending the new administration.
- Cash isn’t always king
- Most RMDs are distributed in cash, but they don’t have to be. You can transfer shares from your tax-deferred IRA to a taxable account, as along as the value of the shares transferred is equal to your RMD. You’ll still owe taxes on the distribution but you can save on any subsequent gains. This strategy makes sense when you transfer shares that have decreased in value because if you sell them out of your IRA, the entire value will be treated as ordinary income. However, if you transfer them to your taxable account, any subsequent gain will be taxed at the favorable capital gains rate when sold.
- You must take RMDs from IRAs and 401(k)s – and there are differences
- If you have a 401(k) or other qualified retirement plan that you haven’t yet rolled over, you’ll want to remember that they are also subject to RMDs, and there are some differences to keep in mind. First, if you have multiple IRAs you have the flexibility to take your entire RMD from one IRA or split the amounts strategically. With 401(k) plans, however, you must take separately calculated RMDs from each account. On the other hand, if you’re still working at age 70 ½ (and you don’t own more than 5% of the company), you can delay RMDs from your 401(k) until the year you stop working, which you can’t do with IRAs.
- Tax withholding isn’t actually mandatory
- As a default, the custodian or plan sponsor will usually withhold 10% of your distribution for taxes but you’re allowed to elect 0% withholdings, which can make sense for different reasons depending on your tax situation and personal preference. Furthermore, it’s an easy change to make – simply let us know if you’d like to make a change or would like to explore the withholding elections that make sense for you.
- You can donate your RMD at any time of the year
- Thanks to Congress’ firm decision that allows taxpayers over 70 ½ to donate up to $100,000 from their IRA and have it count as a RMD, you can save money in taxes and support the causes you care about. You can do this by transferring the money directly from your IRA to the charity for it to count as a tax-free transfer and if you have check-writing privileges on your IRA you can simply write a check to the charity. However, if you take a cash distribution and then donate it to charity, the distribution will be included in your adjusted gross income (and thus reducing your eligibility for AGI-triggered benefits). Although, you can still benefit by taking a charitable deduction and lowering your taxable income.
As always, we’re available to answer any questions you have about required minimum distributions or other considerations you encounter while planning for retirement.