Planning for Required Minimum Distributions

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    Lance C. Steiner, CFP®
    Financial Planner

    One of the most common questions we receive from our clients nearing age 70 is, “When do I have to start taking distributions from my accounts?” The question is referring to Required Minimum Distributions (RMDs). Generally, individuals will begin taking distributions from their qualified retirement plans the year they turn 70½. Technically, the required beginning date is April 1st of the year after you turn 70½. However, if you wait to take your distribution between January 1st and April 1st of the year after turning 70½, you will be required to take two distributions the first year. There are several instances where it may be beneficial to delay distributions until the following year, but predominantly, most benefit from taking distributions in the year they turn 70½. Each year following your first RMD, distributions are required to be complete by December 31.

    Individuals who have a Traditional IRA, SEP IRA or SIMPLE IRA will begin taking an RMD the year they turn 70½, whether they are still working or not. Individuals who are separated from service and have a 401(k), 403(b), or 457(b) will also need to take an RMD. However, if the individual is still employed on December 31st, they will not be required to take a distribution from that employer’s 401(k) until the year they separate from service. Individuals planning to retire at the end of the year (after turning age 70.5) may consider delaying retirement until January 1st to delay the first RMD until the following year.

    Each year the RMD is calculated by dividing the prior year ending account value by a lifetime expectancy factor based on your age at the end of the current year. Most individuals will use the Internal Revenue Service’s Uniform Lifetime Table to determine what factor to use each year. However, individuals with a spouse who is 10+ years younger (and listed as the primary beneficiary of their IRA) can use the Joint Life Table to determine their life expectancy factor each year. With the Joint Life Table, the required distribution each year will be slightly lower to help preserve assets for the younger spouse.

    For individuals who have multiple IRAs, RMDs can be added together and taken from any one or a combination of IRA accounts. This includes Traditional IRAs, SEP IRAs and SIMPLE IRAs. However, if an individual has an IRA and a 401(k), or multiple 401(k)s, the RMDs cannot be aggregated and must be taken from each 401(k). Additionally, if an individual is planning to complete a rollover from a 401(k), and they are required to take a distribution from the account during the current calendar year, the distribution must be completed prior to completing the rollover.
    When individuals begin taking distributions at age 70½, they will need to determine what to do with the net distribution after taxes have been withheld. Some individuals will need to use the distribution to supplement retirement income and meet monthly living expenses. Other individuals may choose to build up a reserve at their bank to cover large, unexpected expenses, such as a new vehicle or home repair. A third option is to deposit or journal the net amount into a brokerage account and reinvest the funds for future expenses or the next generation. Many times, it may be a combination of these options. It is important to incorporate retirement planning and tax planning to determine the best option.

    Individuals that have turned 70.5 and are charitably minded may benefit by completing a Qualified Charitable Distribution (QCD). A QCD allows individuals to designate all or a portion of their RMD to a charitable organization (501(c)3), reducing their Adjusted Gross Income (AGI) by the amount of the QCD. To correctly complete a QCD, it is crucial that the distribution is paid directly from the custodian to the charitable organization so that the individual never receives the funds. For charitable individuals who no longer itemize due to the increased standard deduction under the Tax Cuts and Jobs Act (TCJA) may benefit greatly by completing a QCD. Additionally, a QCD can help alleviate costs tied to Adjusted Gross Income/Modified Adjusted Gross Income levels, such as higher Medicare Part B and D premiums.

    Planning for Required Minimum Distributions begins well before individuals turn 70½ and extends long into retirement. It requires an analysis of pre-tax versus post-tax deferrals during the accumulation stage, the consideration of Roth-Conversions between retirement and age 70½ and creating a plan for distributions after age 70½. Please contact our office to discuss these items further, to begin planning for your future or for current Required Minimum Distributions.