If you’ve contributed to a 401(k) or IRA, you should prepare a strategy for your RMDs (Required Minimum Distributions). After many years of enjoying tax free growth, your retirement savings from non-Roth (i.e. traditional) accounts will eventually be subject to tax. Rather than be caught off guard, take control and learn the ins and outs of your RMDs so you can avoid penalties, and determine the best strategy for re-distributing your RMDs.
Required minimum distributions from your IRA, Simple IRA, SEP IRA, or retirement plan must begin at age 70 ½. You have to take an RMD from your traditional IRA by December 31st, except for your first one, which you can delay until April 1st of the following year. However, this means that you’ll have to take two distributions in one year, which could push you into a higher tax bracket, contributing to your tax burden in retirement. You can either withdraw the entire amount from one IRA, or spread it out over multiple accounts. The rules regarding RMDs for traditional 401(k)s are similar, except that you must take an RMD from each 401(k) you own, and you don’t have to take an RMD if you’re still working in your 70’s.
One reason why it’s so important to know the rules regarding RMDs is that the penalty for failing to take them is equal to 50% of the amount not withdrawn. So, the question becomes, what do you do with your RMDs? You can take an RMD in cash, but you can also transfer the funds to a stock or mutual find. You can’t roll over the RMD into another IRA, although you can reinvest it using a taxable account. You must take an RMD before rolling over funds from a traditional IRA or converting to a Roth. You can also donate up to $100,000 from an IRA directly to charity. This way, the donation doesn’t count towards your adjusted gross income.
It’s not necessarily true that all of your RMDs will be taxed. If you made a non-deductible contribution to your IRA, then part of every withdrawal will not be taxable. However, you must know and indicate which portion of the withdrawal was nondeductible. If you look at a Form 8606 you can see what percentage of your IRA is made up of nondeductible contributions. That is the percentage of each withdrawal that will not be taxed.
Your IRA and 401(k) are important components of your retirement plan, so make sure you have a strategy in place for withdrawing from them. Rolling over an RMD into a Roth, reinvesting it in stocks or mutual funds, and donating directly to charity are some options. There are many ins and outs of RMDs and high penalties for failing to take them, so don’t be taken by surprise.
The rules surrounding RMDs can be complicated, so contact the professionals at Epstein & White before you’re 70 ½. There are ways to minimize your tax burden, and put your RMDs to good use. Click here to schedule your no cost, no obligation review today.
