Getting Your Financial Ducks In A Row Rotating Header Image

rmd

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 […]

Calculating your Required Minimum Distribution

Learn how to calculate your required minimum distribution for your IRA, 401k, 403b or other qualified retirement plan.

6 Year End Tips for a Financially Productive 2017

As 2016 comes to a close in a few weeks and we start into 2017, here are some good tips to consider to start 2017 off with some good strategies that will hopefully become habits. If you’re not doing so already, set up your payroll deductions to save the maximum to your 401k. There’s plenty of time to your payroll allocated so your deductions start coming out on the first paycheck in January. The 2017 maximum contributions are $18,000 for those under age 50 and $24,000 for those age 50 or older. To deduct the max, simply take the number of pay periods you have annually and divide it into your maximum contribution amount. This will allow you to save the maximum amount over 2017. Consider doing the same to maximize your IRA contribution. Those limits are $5,500 (under 50) and $6,500 (over 50) respectively. Check your allowances on your […]

RMD from an Inherited IRA

If you have inherited an IRA you are required to begin taking distributions from the account according to a set schedule. If you are the sole beneficiary of the IRA, how you handle your distributions is up to you. If there are two or more beneficiaries of the IRA, the process becomes more complicated – see the article at the link for more on multiple beneficiary arrangements. There are actually two different schedules that you can use, lifetime distributions and a distribution over 5 years. 5-year distribution The 5-year distribution method is the default period for distribution of an inherited IRA. As the name of the method suggests, in this method the inherited IRA must be completely withdrawn within 5 years of the death of the original owner. There is no specific amount that must be withdrawn in any particular year, as long as the entire account is withdrawn within […]

Charitable Contributions from Your IRA

Once the PATH Act (Protecting Americans Against Tax Hikes) is signed into law, at long last the ability to make a direct contribution from an IRA to a qualified charity will be permanent. For background – a Qualified Charitable Distribution (QCD) is when an individual (age 70 1/2 or older and subject to Required Minimum Distributions from his or her IRA) makes a distribution from his IRA directly to a qualified charity. This distribution can be used to satisfy the Required Minimum Distribution for the year. The distribution is limited to $100,000 for each year per individual. The real advantage of this option is that the owner of the IRA doesn’t have to claim the distribution as taxable income on his or her tax return. Any other distribution of pre-tax dollars typically must be claimed as ordinary income, increasing taxes because of the additional income. In addition, having the increased […]

An Exception to the RMD Rule

For many folks, attaining age 70 ½ means the beginning of required minimum distributions (RMDs) from their 401k, 403b as well as traditional IRAs. There are however, some individuals that will continue to work because they want to or (unfortunately) have to and still want to save some of their income. At age 70 ½ individuals can no longer make traditional IRA contributions. They are allowed to make contributions to a Roth IRA as long as they still have earned income. Earned income is generally W2 wages or self-employment income. It is not pension income, annuity income or RMD income.

RMD Avoidance Scheme: Birthdate Makes All The Difference

As you may recall from this previous article, it is possible to use a rollover into an active 401(k) plan as an RMD avoidance scheme. Of course, this will only work as long as you’re employed by the employer sponsoring the 401(k) plan and you’re not a 5% or greater owner of the company. In addition, the rollover must be done in a timely fashion, prior to the year that you will reach age 70 1/2 in order to avoid RMD. An example of where timing worked against a taxpayer (at least temporarily) recently came to me via the ol’ mailbag: 

Using First Year RMD Delay to Your Advantage

When you are first subject to RMD (Required Minimum Distributions), which for most folks* is the year that you reach age 70½, you are allowed until April 1 of the following year to receive that first minimum distribution.  For all other years you must take your RMD by December 31 of that year.  For many folks, it makes the most sense to take that first year RMD during the first tax year (by December 31 of the year that you’re age 70½), because otherwise you’ll have two RMDs hitting your tax return in that year.  However, in some cases, it might work to your advantage to delay that first distribution until at least the beginning of the following year – as long as you make it by April 1, you’re golden. There may be many circumstances that could make this delay work to your advantage – maybe you’re still working […]

How to Deal With Missed Required Minimum Distributions

What happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA?  In other words, what are your options if you’ve missed Required Minimum Distributions (RMDs) in prior years? The Inheritance So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point, and had designated you as the sole primary beneficiary.  Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… and in this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMD) from your inherited IRA as of December 31 of the year following the year of your mother’s death.  As of now, for example’s sake, let’s say we’re in the […]

Annuity in an IRA? Maybe, now

Forever and a day, the rule of thumb has been that you should not use IRA funds to purchase an annuity – primarily because traditional annuities had the primary feature of tax deferral. Since an IRA is already tax-deferred, it’s duplication of effort plus a not insignificant additional cost to include an annuity in an IRA.  This hasn’t stopped enthusiastic sales approaches by annuity companies – plus new features may make it a more realistic approach. Changes in the annuity landscape have made some inroads against this rule of thumb – including guaranteed living benefit riders, death benefits, and other options.  Recently the IRS made a change to its rules regarding IRAs and annuities that will likely make the use of annuities even more popular in IRAs: The use of the lesser of 25% or $125,000 of the IRA balance (also applies to 401(k) and other qualified retirement plans) for […]

When is a RMD a RMD?

I receive quite a few questions from folks looking for clarification on the rules around Required Minimum Distributions upon reaching age 70½, so I thought I’d jot down a couple of facts about them that you may find interesting. When can I take the distribution? Looking through some notes from readers I found one where it was asked (this is paraphrased for clarity): My birthdate is April 10, 1943, so I will reach age 70½ on October 10, 2013.  Do I need to wait until October 10 or after to take a distribution so that it is counted as my RMD? I responded to this question by saying that, to be safe, I suggest the reader wait until after October 10 to take the distribution. However. (there’s always a however in life, isn’t there?) I subsequently received a message from a reader (thanks, TAM!) with the following updated information: It […]

Special Treatment for an Older Spouse/Beneficiary of an IRA

Note: the situation described in this post was originally brought to my attention by Mr. Barry Picker, of Picker, Weinberg, & Auerback, CPAs, P.C.  Mr. Picker is another of those “rock stars” in the world of retirement plan knowledge, up there with the best of them.  Many thanks to Mr. Picker for sharing his wealth of knowledge. There is a special set of circumstances regarding inherited IRAs that only fits a few cases – but for those cases the rules can work out favorably and it is important to understand how this operates.  The circumstances are that a younger spouse has died and left an IRA to the older, surviving spouse.  In this case, if the decedent-spouse had already begun receiving Required Minimum Distributions (RMDs) from the IRA, the survivor-spouse, if sole beneficiary of the IRA, can make the distribution rules work in his or her favor. In any case, […]

Take Your RMDs From Your Smallest IRA

Here’s a strategy that you could use to simplify your life: when you’re subject to Required Minimum Distributions (RMDs) after age 70½, you have the option of taking separate RMDs from each IRA that you own OR you could take all of your RMDs from one account if you like. As long as you calculate your RMD based upon all of the IRAs that you own, you are free to take the full amount of all of your RMDs from one single account (or several accounts) if you wish.  And keep in mind that the “I” in IRA stands for Individual – so you can’t aggregate your IRAs with your husband’s, for example. By doing so, you could eliminate the smaller account(s) if you wish, thereby reducing paperwork (fewer accounts and statements).  As well, you don’t have to keep track of as many accounts for estate planning. But then again, […]

Guidance on Qualified Charitable Contributions From Your IRA For 2012

January 1, 2013 update: Passage of the American Taxpayer Relief Act of 2012 has extended the QCD through the end of 2013.  See this article for more details. In past tax years (through the end of 2011) there was a provision available that allowed taxpayers who were at least age 70½ years of age to make distributions from their IRAs directly to a qualified charity, bypassing the need to include the distribution as income.  The law allowed the taxpayer to use a distribution of this nature to satisfy Required Minimum Distributions (RMDs) where applicable. This law expired at the end of 2011, but in years past Congress has acted very late in the year and retroactively reinstated this provision.  For more detail on how this provision (if not reinstated) can impact your taxes, see the article Charitable Contributions From Your IRA – 2012 and Beyond. Guidance For 2012 If you […]

IRS Cracking Down on IRA Rules

It seems that some of the rules the IRS has put in place with regard to IRAs have not always been watched very closely – and the IRS is stepping up efforts to resolve some of this.  According to the article in the WSJ, IRA Rules Get Trickier, an estimated $286 million in penalties and fees were uncollected for 2006 and 2007 tax years’ missed distributions, over-contributions, and the like. The title of the article is a bit misleading, because the rules are not changing or getting “trickier”, the IRS is just going to be paying closer attention to what you’re doing with your account.  This is set to begin by the end of this year, after the IRS delivers their report to the Treasury on how to go about enforcing the rules more closely. The first rule being monitored more closely is the contribution rule – for 2012, you’re […]

RMDs Don’t Have to Be Taken in Cash

But… It’s a little-known fact that distributions from an IRA  or a Qualified Retirement Plan can be taken in kind, rather than in cash.  You can in any circumstance take distribution from the account of stocks, bonds, or any investment that you own, just the same as if it were cash. The downside to this is determining valuation for the distribution.  You could value the distribution on the day of the distribution by opening price, closing price, average price, or mean between the day’s high and low prices.  Where you really get into trouble is when the security that you own is very thinly-traded, such as a small company or very infrequently-traded bonds.  These can be very hard to value on the date of distribution, and as you might recall, the value of a distribution for Required Minimum Distributions (RMDs) must be valued appropriately in order to ensure that the […]

Forget your RMD? Here’s What to Do

If you have an IRA that you have to take Required Minimum Distributions (RMDs) from, you need to do this every year by the end of the year.  So what if you forget one year? Image by Sir_Iwan via Flickr The rule is that if you don’t take your RMD by the end of the year, you could be subject to a penalty of 50% of the amount of the RMD.  If you’ve realized your error before the IRS has notified you, there are a few things you can do to try to resolve the situation. The very first thing you should do is immediately withdraw the RMD in the amount that you should have in the previous year.  Contact your IRA custodian and request the distribution as soon as possible. Then, if you’ve already filed your tax return for the previous year, fill out an amended return (Form 1040X), […]

Required Minimum Distributions for IRAs and 401(k)s

This is one of those subjects that can be a bit confusing – and it’s based on the rules that apply to the different kinds of plans.  You are aware that you’re required* to begin taking Required Minimum Distributions (RMDs) once you reach age 70½ – but did you know that specifically which account you take the RMD from has some flexibility?  Well – not just flexibility, also some rigidity… Image by -RejiK via Flickr There is a Difference Between IRA and 401(k) Starting off, we need to understand that, in the IRS’s eyes, there is a big difference between an IRA and a 401(k).  For brevity, we’re referring to all sorts of Qualified Retirement Plans, such as 403(b) or 457 plans, as 401(k) plans. You may consider the two things to be more or less equal, but if you think about it, there are considerable differences between the two […]

%d bloggers like this: