RMD’s for IRA’s and You

RMD's for IRA's and You

Are you age 70 ½ and now required to take your Required Minimum Distribution (RMD) from your IRA? If so before you do read this blog and get some valuable information and maybe save yourself some money and time in the process. While this is not tax advice in any manner it is what I have researched on the subject of RMD’s and what I have found. As always, if you have or need tax advice seek the counsel of an experienced tax professional.

The first bit my parents asked me about not a week or so ago, and that is when does the RMD start for my mother. Well in researching the answer for her I found the following bit of helpful information. For those who turn 70 between January 1st and June 30th, you will turn 70 ½ in 2016, and you are required to take an RMD from your IRA. For those born after July 1st you get to wait until 2017 to take your first RMD. For normal years, you must take your RMD in the year of your birthday, but first-time retirees taking their first RMD may wait as long as April 1, 2017, to take their first RMD. But that will mean you need to take two RMD’s in 2017 and that could have severe tax implications as you will have doubled your payment in a single year.

Next you must know how much your RMD will be so you know you are taking what Uncle Sam expects you tax out and thereby pay taxes on. For those who turn 70 ½ in 2016, you will need to use the life expectancy provided by the IRS and this year for you that would be 27.4. As an example if your IRA or IRA’s held $500,000 your RMD would be that divided by 27.4 for an RMD of $18,248 this year.

The rules are a little different for 401(k) plans as they too require an RMD at age 70 ½. But in these instances if you have more than one of these accounts you must figure out an RMD for each retirement account. You cannot make a single RMD as you do with IRA and that is with IRA’s you can take your RMD out of a single account and are not made to take one from each account. Also, if you are still working when you reach age 70 ½ with an employer you have a 401(k) with you may wait until you retire before you are made to take an RMD from that account.

Another secret that was uncovered in the research for this blog was you are not required to take your RMD in cash. If, for say, the market is having a down year you can elect to switch the amount of your RMD in shares of whatever it is you own in the IRA to a taxable account. That way you keep the depreciated security and can sell it later when the prices are better. The key here you will have to pay taxes on the whole amount of the RMD from either cash or by selling some of the shares. You can also elect to have your IRA custodian keep the standard 10% tax withholding that they normally would. Then when you do sell the security, it would be subject to taxation as an either a short-term or long-term capital gain and not ordinary income.

If you made any IRA contributions that were not deductible, you do not owe taxes on that portion of your RMD. If you contributed 10% of your IRA in non-deductable contributions that 10% would not be taxed again, as you have already paid te taxes on it before putting the funds in your IRA to begin with. But these contributions must be maintained and tracked by the taxpayer and the IRA custodian or IRS will not be able to assist you here. They also require a Form 8606 have been filed in the year the contributions were made.

If, for some reason, you cannot make your RMD the penalty is severe. When it is imposed, the penalty is 50% of what the RMD should have been. But in the event, you had a legitimate reason for missing the year-end target date for making your RMD the IRS has been known to waive the penalty. If you had an emergency and missed the date, make the RMD as soon as possible to let the IRS know you had a legitimate reason for missing the end of the year date. Also, go ahead and file Form 5329 and explain the reason for missing the target date. If the IRS accepts your reason they will waive the penalty and in the event they do not they will send you a bill. Best to not wait until the end of the year and avoid this situation if at all possible.

And as always you can take more than the RMD as that is just the minimum that you are required to take. There are no rules against taking more, but you will be responsible for any tax consequences that are a result of the extra withdrawal.

These are some good points to consider if you turn 70 ½ this year and have an IRA or IRA’s. And as always, if you have any questions or need any additional information, feel free to contact me.

Contact Us

We're not around right now. But you can send us an email and we'll get back to you, asap.

Not readable? Change text. captcha txt
0