For many, once we reach the age of 70.5 IRA and other Qualified plans mandate a distribution so Uncle Sam can get his fair share of taxes. For some, RMD’s or Required Minimum Distributions occur even sooner.
What is an RMD ?
A Required Minimum Distribution (RMD) occurs most frequently for those turning age 70.5 with IRA or other Qualified (fancy word for never taxed $$) funds. In certain instances, as an example, if a stretch IRA has been commenced, in order to avoid taxes, any age person may be required to complete a RMD.
Why an RMD ?
Taxes, taxes, taxes… In almost all cases the underlying reason for the mandatory distribution is to pay Uncle Sam his due. Before getting too upset, remember, these funds most likely have been deferred without taxes, grown/compounded tax deferred, and are just now becoming taxable. Taxes are ONLY on the funds withdrawn … Not a Bad deal!!
Required means Required … DO NOT FORGET
Uncle Sam has the right to charge a 100% tax on funds not distributed that were in need. While there are certain workarounds if you forget, be safe, keep good records, and make sure you are taking those RMD’s in a timely fashion.
RMD Distribution Technique
While the IRS mandates our RMD amount each year they do allow us the option of lumping our various accounts together and only taking a distribution from one account if desired.
Withdraw from your most liquid and keep your best earning IRA while avoiding any withdrawal penalties may be a possibility by directing your TOTAL distribution from just one IRA. Do not forget to add them all together as that number is what the IRS wants to see us take our distributions based upon.
Keep Up With After Tax Contributions
If you have any after tax contributions in any of your qualified/IRA/RMD accounts be sure to keep up with the basis. Withdrawals from a taxable RMD account are taxed pro-rata and will not be taxed on your after tax basis. Check with your tax professional, but this basis should also be showing up on form 8606 EVERY YEAR in your tax return.
Taking Your Frist RMD Early
Uncle Sam gives us first time RMD ‘ers a break and allows that you take your first RMD as late as April of the following year. Ahhh ….. but there is a catch, if you wait/defer your first RMD, you will be faced with TWO RMD’s in this tax year. Every situation is different, so choose carefully, but be aware if you delay the max you will double up!
Rather than distributing all funds immediately or over a mandated five-year period of time, giving heirs the opportunity to S*T*R*E*T*C*H (my attempt at grammatical humor) their IRA and other qualified benefits can be very tax friendly. Having a trust as beneficiary or keeping your old company 401k plans disqualify you from this in most cases.
If you are still working, you may be able to defer your RMD for the company plan you are a participant. VERY IMPORTANT … the other qualified IRA plans will most likely still require summing the total and distributing a required RMD. This option is very specific in nature, check with us, your tax professional, or your HR representative for exact details, and keep good records of your discussions.
“In and out” of certain qualified plans i.e. SEP or others may be a possibility. If you are mandated to take and RMD, but still working, you may be able to make/receive an offsetting contribution. Be sure to check your plan specifics on this technique.
RMD Distribution Techniques
Eventually, no matter what you will need to take an RMD, so here are the popular options for where the rubber meets the road.
- Switch the distribution to your taxable account and withhold taxes (far and away our most popular technique.)
- Fund a Roth with the RMD funds.
- Spend it.
- Donate to charity.