You have spent your whole life reading articles and speaking with financial advisors telling you to save, save, save for retirement, but there are some important questions to ask about your retirement account and distributions. Have you been saving and not taken any money out of your retirement accounts? Are you still working or retired but haven’t had to take any money out of your retirement accounts in order to live on? Even if you have taken distributions from your retirement accounts this will serve as a great reminder.
Required Minimum Distributions
As we near the end of 2015, it is important that you take your Required Minimum Distributions (RMD) from retirement accounts if you are at least 70 ½ years old. The tax law requires that individuals over the age 70 ½ make distributions from their tax-deferred (i.e. 401(K), 403(B), IRAs, etc.) retirement accounts annually. If a person fails to make these distributions there is a 50% penalty on the RMD amount. The penalty along with the tax on those required distributions is so substantial it’s likely you won’t see much cash from the RMD, instead giving it mostly to Uncle Sam. For example, if your RMD for the year was $100,000 and you failed to distribute it on time the penalty would be $50,000. Assuming a top tax rate of 39.6% federal and 6% state tax, you would have to pay $45,600 in taxes on that RMD when you finally make the distribution. Effectively receiving $4,400 from the RMD that wasn’t distributed timely.
If you turned 70 ½ during 2015 you have some options with your tax-deferred retirement accounts. In general for IRAs (Individual Retirement Accounts) you will need to make a “2015” distribution. Only for the year you turn 70 ½ will you be able to take the distribution in either the current year, by December 31st or by April 1st of the following year. In whichever year you take the “2015” distribution that will be the tax year it is taxed in. For example, if you wait to take the “2015” required distribution by April 1, 2016, you will have 2 distributions taxed in 2016 (the “2015” distribution plus the “2016” distribution), as the “2015” distribution doesn’t count as your “2016” distribution.
401(K), 403(B), etc. plans have some different rules depending on the persons working situation. In general, if the person is not currently working the distributions follow the same rules as with IRAs. If a person is still working they may be allowed to delay required distributions from these accounts until the year they retire if they are over 70 ½. This rule does not apply to some owners or self-employed persons. You will want to check with an Anders advisor to help you determine your Required Minimum Distribution requirements for these types of plans.
In general once you have started taking RMDs from these retirement accounts you will need to do so annually by December 31st with the help of your plan administrator.
If you like to be charitable, think about making your IRA RMD directly to a qualifying charity. Making this distribution to a charity would satisfy your need to make your distribution for the year. The tax law allows for Qualified Charitable Distributions (QCD), where up to $100,000 per taxpayer is allowed to be made from your IRA to a qualified charity. You will want to make sure the distribution from the IRA goes directly to the charity in order for it to qualify as a QCD. The important thing to note is that these charitable distributions from IRAs are not included in your Adjusted Gross Income (AGI), which can help you stay out of higher tax brackets and help keep your income under thresholds that trigger certain other taxes on investments. With the QCD you effectively get a tax deduction for donating to charity by not being required to pick up the distribution into income. This tax provision was just extended permanently, so if you have already taken your RMD for 2015 you may want to take advantage of this rule in future years.
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