Note: If you are the beneficiary of an inherited retirement account from a loved one, the RMD rules applicable to the inherited retirement account may vary from the information below. To learn more, review the following content: Inherited IRAs for Surviving Spouses and Inherited IRAs for Non-Spouse Beneficiaries.
What Are Required Minimum Distributions (RMDs)?
The IRS requires a minimum amount be distributed from retirement accounts annually after reaching age 70 Â½. Required Minimum Distributions (RMDs) apply to all employer-sponsored qualified retirement plans like 401(k)s, Roth 401(k)s, 403(b)s, 457(b)s, profit-sharing plans, defined benefit plans, etc., as well as traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. RMDs are generally taxed at ordinary income tax rates however, a RMD that is a return of qualified basis is tax-free. Note: RMDs are not required for Roth IRAs.
Who Must Take A RMD?
Account owners are responsible for taking the correct RMD amount by the end of each calendar year. The penalty tax for not distributing the minimum required amount is 50% of the amount required to be distributed but not withdrawn.
When Do You Have to Take Them?
Your RMD must be taken annually after reaching age 70 ½. If you are still working past the age of 70 and you are less than a 5% owner in the company sponsoring the plan, you may delay taking your RMD until the year you retire if the plan allows it (for qualified plans only, not IRAs). The first RMD must be taken for the year in which you turn 70 ½ but can be delayed until April 1 of the year following the year in which you turn 70 ½. However, for all subsequent years, it must be taken by December 31 of that year. Postponing the first year’s RMD may be a good approach if you estimate that your income in the following year would be substantially lower. But note that if you postpone taking your first RMD, the following year will then require two distributions (one from the previous year plus that year’s RMD) which may diminish the potential for paying tax at a lower rate.
How to Take RMDs
RMDs are calculated for each account by dividing the prior year’s December 31st balance of the account by a life expectancy factor that is published by the IRS. The most commonly used set of factors is found in the Uniform Lifetime Table as it applies to unmarried account owners, owners with non-spouse beneficiaries or an owner with a spouse beneficiary that is not more than 10 years younger. Use the Joint and Last Survivor Table factors if the sole beneficiary of the account is your spouse who is more than 10 years younger than you. These tables can be found on the IRS website. We recommend working with a CPA to ensure your RMD amount is correct.
Most financial institutions will estimate the amount of the RMD you need to take and you can work with your Beacon Pointe Client Service Associate to complete the process. If you recently changed brokerage firms and your accounts were not held at your current firm at the end of the prior year, you will need to check with your CPA to calculate the RMD for that year.
Other Items to Know
Any excess distribution from one year cannot be applied to future RMDs year and rolling your RMD into another tax-deferred retirement account is not allowed. A RMD must be calculated separately for each IRA account but you can withdraw the total amount of the RMD from one or more IRAs or 403(b)s separately. However separate RMDs are required to be taken from each qualified plan (e.g., 401(k), profit sharing and 457(b)) account.
Spend or Save RMDs
If your RMD is part of the income that supports your daily living needs, taking it monthly or quarterly may be the best approach as it allows you to dollar cost average out of the market and timely provides the cash flow you need.
If you don’t need the funds to cover your expenses, consider taking your RMD at the end of the year. This approach keeps the funds tax-deferred for as long as possible. If you don’t need the proceeds to live on you could also take your RMDs ‘in kind’ by transferring it directly to a non-retirement brokerage account rather than selling it. For example, if you own a mutual fund that is now closed to new investors and you don’t want to liquidate it, an in-kind transfer will preserve your access. You may also want to transfer the asset in kind to satisfy your RMD if you have an asset that you consider undervalued, as transferring it in kind would allow you to pay tax on the reduced value and sell it after it is distributed with a post-distribution gain that would be capital gain with preferential tax rates.
RMD to Charity?
If you don’t need the RMD to live on and are charitably inclined, you could donate it to charity(ies) to avoid paying income tax on it. The PATH Act of 2015 made the Qualified Charitable Distribution (QCD) rules permanent, allowing distributions of up to $100,000 annually from an IRA to go directly to certain qualified charities (most public charities, but check with your CPA) and avoid including the distribution as income on your tax return. Donors will not receive an income tax deduction for the charitable donation, but they do not have to pay taxes on that income. If you are no longer receiving an itemized deduction for your charitable donations given the now higher standard deduction, you might consider giving in this capacity instead which at least reduces income subject to tax.
RMDs and Taxes
We suggest working with your CPA to determine the appropriate amount of income taxes to withhold on your RMD (if any). If you are already working with your CPA to estimate your quarterly estimated tax payments, then you may not need to withhold taxes from your RMD. Tax withheld from RMDs decreases the amount of estimated tax payments needed and withheld taxes from your RMD are credited to your estimated tax obligation as if the taxes were paid in equal installments (even if it is not received until late in the year).
If someone you know could benefit from a conversation with one of our advisors, please make the connection. We would be happy to provide a complimentary consultation.
Important Disclosure: Beacon Pointe Advisors does not offer legal or tax advice. Please consult with the appropriate tax or legal professional regarding your circumstances. This information is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Only a tax or legal professional may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement any design discussed herein. Nothing herein should be relied upon as personalized investment advice, nor should it be considered an individualized recommendation, offer or solicitation for the purchase or sale of any security or to adopt a specific investment strategy. An investor should consult with their financial professional before making any investment decisions.
© Beacon Pointe Advisors. All Rights Reserved.