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Once You Turn 70 ˝ This Tax Requirement May Apply To You - Here's What You Need To Know

Rocco A. Carriero

If your retirement plan includes tax-advantaged accounts, there is a particular tax rule you should know about: required minimum distributions, or RMDs. (Photo: www.facebook.com)

If your retirement plan includes tax-advantaged accounts, there is a particular tax rule you should know about: required minimum distributions, or RMDs. This tax rule can be complicated, but the following commonly-asked questions can help you understand how it works and how it may apply to you.

Q: What are RMDs?

A: Required minimum distributions are retirement account withdrawals mandated by the IRS once you reach age 70.5. By requiring you to withdraw a portion of your savings, the IRS is able to tax income that has been allowed to grow tax-free.

Q: What types of accounts fall under these tax rules?

A: RMDs generally apply to all tax-deferred retirement accounts, including traditional IRAs, SEP IRAs and SIMPLE IRA plans. An inherited IRA is also subject to these tax rules. Roth IRAs are exempt from this requirement because they are funded with after-tax dollars.

Q: When do I need to withdraw RMDs?

A: RMDs are an annual obligation once you reach age 70.5. In the year you turn 70.5, your first RMD is due by April 1 of the following year. Thereafter, you must withdraw the required amount by December 31 each year. (There is one exception to the 70.5 rule: If you are still working and participate in a 401(k), profit sharing, 403(b) or other defined contribution plan, you can - if allowed by the terms of the plan document - generally wait until retirement to make RMDs from this type of retirement account.)

Q: How are RMDs calculated?

A: Your life expectancy is a factor in your RMD calculation. The IRS provides life expectancy charts and worksheets to help you determine how much you need to take from your IRA. The calculation is different if you participate in a Defined Contribution Plan, however the plan administrator often will calculate your RMD for you. Your financial advisor and tax advisor can help you plan for and make the appropriate withdrawals to meet the requirement.

Q: What if I own multiple accounts?

A: Once you turn 70.5, each eligible account you own will have an RMD requirement. If you own multiple IRAs, you can choose to add up the RMD amount for each account and withdraw the total from one eligible account to satisfy the requirement for all of your accounts.

Q: Can I withdraw the same amount every year?

A: RMDs are not something you can set and forget. The amount you are required to withdraw can change each year, so it's important to stay current on the rules. A financial advisor and tax advisor can help you calculate and request your distribution. Tax withholding is another consideration to discuss with your tax preparer.

Q: What happens if I don't take the distribution?

A: Ignoring the RMD rule can trigger costly financial penalties. A skipped withdrawal may be taxed at 50 percent. If you miss a deadline or miscalculate, consider withdrawing the required amount as soon as you realize your mistake and consult your tax preparer.

Q: Do I need to spend my RMD?

A: No. If you don't need the cash infusion, consider reinvesting withdrawn funds in a non-retirement investment account. Set aside whatever you may need to take care of tax withholding, if applicable. You can also consider using your RMD to make a charitable contribution (see below).

Q: May I donate my RMD to charity?

A: Yes, you can, if the contribution is paid out directly from your IRA (by the trustee) to an eligible charity. This is called a qualified charitable distribution (QCD). (If you take the RMD as income and then donate it, the money will count as taxable income.) A QCD is generally tax-deductible, up to certain limits. This type of distribution allows you to support the non-profit organizations you care about while potentially reducing your tax obligation. Be sure to obtain documentation from the charity and provide it to your tax preparer to preserve your tax advantage.

Rocco is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Southampton, NY. He specializes in fee-based financial planning and asset management strategies and has been in practice for over 20 years. Advisors is licensed/registered to do business with U.S. residents only in the states of NY, NJ, TX, MA, PA, NC, NH, UT, NV, CA, NM, WA, VT, MS, MD, RI, FL, MO, SC, GA, MN, CT, AZ. Ameriprise Financial Services Inc., and its representatives do not provide tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. www.roccocarriero.com

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