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Remember Your RMD

It’s getting close to the end of the year and that means many individuals need to take their required minimum distributions (RMDs). It also means that there will be individuals who must begin taking their required minimum distributions as they will have reached the magic age of 70 ½.

For those already taking RMDs, check with your advisor or asset custodian and find out the amount you need to take and how you can receive payments. In most cases, RMDs can be taken in an annual amount, or monthly via check or direct deposit. The specific RMD amount is based on the account balance as of December 31st the previous year and your age. You can use the RMD calculator found here to get an idea of your RMD amount.

Additionally, be sure to account for any taxes you might owe. For 401k type plans, 20 percent will be withheld for taxes automatically. For IRAs, you must decide how much you want withheld, if any at all. Naturally, taxes don’t apply to qualified Roth 401k or Roth IRA plans.

However, RMDs are still required from Roth 401k, 403b and 457 plans. This is not the case for Roth IRAs – which do not have RMDs at age 70 ½. Many individuals will do a qualified trustee-to-trustee transfer (rollover) from their Roth 401k to their Roth IRA to avoid RMDs.

For those beginning their first RMDs, they have until April 1st the year following the year they turned 70 ½ to take their RMD. While this delay is only allowed in this special circumstance, individuals need to be aware that if they choose to delay until April 1st of the following year, they’ll need to take two RMDs in that year.

For example, Rob turns 70 ½ in March of 2017. Rob can wait until April 1st, 2018 to take his 2017 RMD. However, since Rob waited until 2018 to take his 2017 distribution, he’ll have to take his 2017 and 2018 distributions in the same year – 2018. This can have adverse tax consequences for Rob if he’s taking taxable RMDs. Depending on the amount, it could put Rob in a higher tax bracket, increase his AGI, and lower his chances to qualify for other tax deductions or credits tied to AGI.

Finally, even though you must take an RMD, it doesn’t mean you must spend it. Many individuals will reinvest the money, give to charity, or use the money to fund other opportunities – like college savings for their grandchildren. Just remember, you cannot reinvest your RMD into your 401k, IRA, or any other plan requiring “earned income” for contributions. RMDs are not considered earned income. However, the money can simply be invested in a non-qualified investment account.

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