As the calendar approaches year-end, it’s important to begin thinking about and planning for personal income taxes, related year-end income (or expense) and the correlating deadline events. One deadline that is quickly approaching applies to retirement accounts: required minimum distributions or RMDs. If you’re a tax filer over the age of 70½ or turning 70½ in 2018 with individual retirement accounts balances funded by deductible (pre-tax) contributions, you need to make sure you have withdrawn at least the required minimum amount during the year or taken your RMD (whether you like it or not) by 12/31/2018.
Failure to take the RMD or any part thereof carries a steep penalty of 50% of the amount not withdrawn in addition to the applicable taxes due had it been taken on or before the applicable deadline.
RMDs are calculated based on the account holder’s age, the aggregate value of all retirement accounts covered by the RMD rules as of December 31st of the prior year, and the joint life expectancy of the account holder and a hypothetical beneficiary assumed to be 10 years younger than the account holder. The type of retirement accounts covered by the RMD aggregation rules include all IRAs (Traditional, Rollover, Simple and SEP) except Roth IRAs.
Employer sponsored retirement accounts such as 401(k)s and 403(b)s are also subject to RMD rules but are calculated separately from IRAs using the same IRS stipulated formulas. However, persons over the age of 70½ who are employed and eligible to participate in an employer sponsored plan may contribute to that plan and defer taking withdrawals until they are no longer employed and participating in the plan.
While RMDs impose an obligation and associated tax liability on retirement account holders, they can be proactively managed and incorporated into a managed retirement drawdown (MRD) plan.
What are my options?
With the enactment of the TCJA and the lower Federal tax rates now in effect, IRA holders may want to consider converting some of their IRA balances to Roth IRAs. This would reduce the value of future RMDs from remaining balances in IRAs thereby reducing income taxes. Pre-RMD withdrawals would also provide a hedge against the possibility of future tax rate increases.
Another strategic use of IRA balances prior to the onset of RMDs is to take distributions at age 66 in lieu of Social Security benefits at full retirement age (FRA). Waiting until age 70 could increase SS benefits by 32% thereby providing a source of higher and stable income with longevity protection.
And for IRA holders who are taking RMDs now and intend to make charitable contributions, the IRS rules permit all or part of their RMDs to be treated as Qualified Charitable Distributions (QCDs) up to $100,000 and other income limitations, thereby providing opportunities for income tax savings.
We invite readers to contact us at Sax Wealth Advisors if you have any questions regarding RMDs and the retirement and tax planning opportunities they present in managing retirement drawdowns from their retirement accounts. You can reach us at (973) 859-2199 or www.saxwa.com.
Gregory Duffy is a Wealth Advisor at Sax Wealth Advisors with over 40 years of experience designing and implementing comprehensive financial and investment plans. He can be reached at firstname.lastname@example.org.