If you are turning age 70 1/2 this year, this article is for you. You will most likely have to start taking required minimum distributions from your retirement accounts. This article will outline:
- Deadlines to take your RMD
- Tax implications
- Strategies to reduce your tax bill
How is my RMD calculated?
The IRS has a tax table that determines the amount that you have to take out of your retirement accounts each year. To determine your RMD amount you will need to obtain the December 31st balance in your retirement accounts, find your age on the IRS RMD tax table, and divide your 12/31 balance by the number listed next to your age in the tax table.
Exceptions to the RMD requirement……..
There are two exceptions. First, Roth IRA’s do not require RMD’s. Second, if you are still working, you maintain a balance in your current employer’s retirement plan, and you are not a 5%+ owner of the company, you do not need to take an RMD from that particular retirement account until you terminate employment with the company. Which leads us to the first tax strategy. If you are age 70½ or older and you are still working, you can typically rollover your traditional IRA’s and former employer 401(k)/403(b) accounts into your current employers retirement plan. By doing so, you avoid the requirement to take RMD’s from those retirement accounts outside of your current employers retirement plan and you avoid having to pay taxes on those required minimum distributions. If you are 5%+ owner of the company, you are out of luck. The IRS will still require you to take the RMD from your retirement account even though you are still “employed” by the company.
In the year that you turn 70½, if you do not meet one of the exceptions listed above, you will have a very important decision to make. You have the option to take the RMD by 12/31 of that year or wait until the beginning of the following tax year. For your first RMD, the deadline to take the RMD is April 1st of the year following the year that you turn age 70½. For example, if you turn 70½ on June 2017, you will not be required to take your first RMD until April 1, 2018. If you worked full time from January 2017 – June 2017, it may make sense for you to delay your first RMD until January 2018 because your income will most likely be higher in 2017 because you worked for half of the year. When you take a RMD, like any other distribution from a pre-tax retirement account, it increases the amount of your taxable income for the year. From a pure tax standpoint it usually makes snese to realize income from retirement accounts in years that you are in a lower tax bracket.
SPECIAL NOTE: If you decided to delay your first RMD until after December 31st, you will be required to take two RMD’s in that year. One prior to April 1st and the second before Decemeber 31st. The April 1st rule only applies to your first RMD. You should consult with your accountant to determine the best RMD strategy given your personal income tax situation. For all tax years following the year that you turn age 70½, the RMD deadline is December 31st.
VERY IMPORTANT: Do not miss your RMD deadline. The IRS hits you with a lovely 50% excise tax if you fail to take your RMD by the deadline. If you were due a $4,000 RMD and you miss the deadline, the IRS is going to levy a $2,000 excise tax against you.
Contributions to charity to avoid taxes
Another helpful tax strategy, if you make contributions to charity, a church, or not-for-profit organization, you have the option with IRA’s to direct all or a portion of your RMD directly to these organization. In doing so, you satisfy your RMD but avoid having to pay income tax on the distribution from the IRA. The number one rule here, the distribution must go directly from your IRA account to the not-for-profit organization. At no point during this transaction can the owner of the IRA take possession of cash from the RMD otherwise the full amount will be taxable to the owner of the IRA. Typically the custodian of your IRA will have to issue and mail a third party check directly to the not-for-profit organization.
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.