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Tax Planning: Don’t Forget Your Required Minimum Distributions

Posted by Michael J. O'Connor | CWS®, Vice President Investments
November 15, 2017

Dont-forget-to-take-required-RMDRepublicans on Capitol Hill are currently working to make major changes to the tax code, but one tax rule does not seem likely to change anytime soon: required minimum distributions (RMDs). For most of our lives, investors have the benefit of saving into IRAs, 401(k)s, 403(b)s, etc. with tax-deductible contributions and tax-free growth, but eventually the day comes when Uncle Sam gets his cut.

That starting point when the IRS requires you to withdraw from your IRA or other retirement account for is by April 1 of the year following the calendar year in which you reach age 70½ (which is 6 months after your 70th birthday). For example, if you are retired and you turned 70 on June 30, 2017, then December 30, 2017 marks the day you reach 70 ½. That means you must take your first RMD for 2017 by April 1, 2018. Every year thereafter, you have until December 31 to get it done. 

If you have one of these accounts and you’re 70 ½, you almost certainly have to take an RMD:1

  • Traditional IRAs
  • SEP IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans
  • Other defined contribution plans

How Do You Know How Much You’re Required to Withdraw?

The IRS provides a nifty worksheet for calculating your required minimum distribution for any given year. All you need to know is the total balance of your IRAs/401(k)s/etc. from December 31 of the previous year. Then, you simply divide that number by a figure provided on the IRS’s “Uniform Lifetime” table and voilà, you have your number.

You can access the worksheet here.

To note! If your spouse is the sole beneficiary of your retirement account, and he/she is 10 years younger than you, then use this worksheet. 1

It is very important that you take the correct amount (or more) of your required minimum distribution each year. If you don’t, you’ll be knocked with a tax penalty of 50% of the shortfall (unless you can persuade the IRS to waive it for “reasonable cause”).2

Do You Have Options for How to Use Money from Your RMD?

Yes you do! Some people think the only option for taking an RMD is to withdraw cash from an IRA, and that’s that. You just have to spend it. But there are other, more creative uses for your RMD that you may not be aware of. Here are three:

Idea #1: Reinvest Your RMD. There is nothing stopping you from taking your RMD and investing it back into the market, in a nonretirement account like a brokerage account. You can then invest the money according to your goals, time horizon, risk tolerance, and financial circumstances. If you do not want to lose market exposure while taking your RMD, you also have the option of transferring shares of stock, ETFs, mutual funds, etc. from your retirement account to your nonretirement account. That way, you do not lose market exposure and you’re fulfilling your RMD at the same time.

Idea #2: ROTH IRA Conversion. If you convert your IRA into a Roth IRA, you no longer have to worry about RMDs since they are not required on Roth IRAs. Of course, one drawback is that you’ll have to pay taxes on the amount converted, but if this money is all for heirs, it may be something you want to do for their sake. This can be a complex process and decision, so be sure to check with your financial advisor, estate or tax attorney, and feel free to reach out to one of our Wealth Managers.

Idea #3: Charitable Giving. If you do not need the money or you’re charitably oriented, you may want to consider a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. If you’re over age 70 ½ and you’re fulfilling an RMD, you can use your QCD amount toward your RMD for the year up to $100,000. The best part: the QCD is not included in your gross income and does not count against the annual limits on deductions for charitable contributions. Like the Roth conversion, the rules for QCDs are complex, so please be sure to consult your tax advisor or to give us a call for help.

Need Help with Your Required Minimum Distribution (RMD)? Call WrapManager

Our Wealth Managers would be happy to help you not only calculate, but also to fulfill your RMD. We can help you decide how you want to take your RMD and work with you and your IRA custodian to get it done. Just call us at 1-800-541-7774 or send an email to wealth@wrapmanager.com and we’ll help you work through it.  

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1. Required Minimum Distributions (RMDs) IRS.gov
2. Kiplingers

The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.

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