Five Things to Know about Taking Your RMD

When you retire, the government makes you take money out of your IRA, it's called Required Minimum Distributions RMDs.

We all want to have enough money to retire with. We also have to remember about paying tax on that money as well.


An RMD is a Required Minimum Distribution.  That’s the money that you’ve saved up in an IRA or a 401(k) for all these years.  Remember how you got a tax deduction for saving that money?  Well, that was only temporary and the time will come when the IRS wants their tax money back!  Here’s what you need to know!


Number 1:  Required Minimum Distributions (RMDs) start at age 70 and 1/2.  If you turn 70 on June 30th, you need to take an RMD distribution that same year.  If you turn 70 on July 1st, you can wait until next the year.


Number 2:  If you screw up and miss the December 31st deadline the first year, you still have until April 1st of the next year to get it done.  That’s only good for the first year though.  The downside to taking your distribution on April 1st  is – you still have to take your second distribution by December 31 of that year.  That means you’ll be hit with two years of  RMD income on your tax return instead of just one.


Number 3:  If you don’t take your RMD, the penalty is 50% of what you should have taken out in the first place.  Fifty Percent!  Let’s say you have $500,000 saved up in your IRA.  The first year RMD on that account should be $18,248.*  If you didn’t take your RMD, the tax penalty would be $9,124.  That’s not a typo.  You’d pay over nine thousand dollars as a penalty for not taking your RMD.    Ouch!  As as you can see, it’s really important to make sure you take your RMDs!  (Sounds kind of like a vitamin, doesn’t it?)


Number 4:  People often ask me if they can take more out of their accounts than the RMD.  The answer is yes you can!  It’s your money, you may take as much of it out as your want, you just have to pay the tax on it.  The RMD is just the minimum that you’re required to take.


Number 5:  But if you do take out more than the RMD, you can’t apply that amount to the RMD that you need to take out next year.  For example:  let’s say that instead of taking out $18,248 like we did in that earlier example, you took out $30,000.   Your RMD calculation for the next year would be $17,736.  You’d still have to take the whole $17,736, you couldn’t apply the extra $11,752 that you took the year before to only take $5,984.


So if you’re nearing 70 and 1/2, be sure to consult your financial advisor to make sure that you are receiving your Required Minimum Distributions on time to avoid a penalty.


*Using the Uniform Lifetime Table for RMD distributions, the distribution period for someone who is 70 years old is 27.4.  To compute the RMD on $500,000 take $500,000 divided by 27.4 = $18,248.


**Using the Uniform Lifetime Table for RMD distributions for someone who is 71 years old with $470,000 remaining in their IRA you’d take $470,000 divided by 26.5 to get $17,736.



Qualified Charitable Distribution: Last Minute Tax Tips for Seniors


Qualified Charitable Distributions help save on taxes

If you are over 70 and 1/2, you may be able to take advantage of a Qualified Charitable Distribution.




The Qualified Charitable Distribution (also known as a Charitable IRA Rollover) is now a permanent part of the tax code!


What is a Qualified Charitable Distribution (or QCD)?  If you’re 70 and 1/2 or   older, you’re required to make required minimum distributions (RMD) from your Individual Retirement Account (IRA.)  Even if you don’t need the money, you have to take it out of your retirement account and you have to pay tax on it.  If you don’t, the penalties are even worse than any tax you’d have to pay. Additionally, many seniors don’t get the benefit of claiming their charitable donations on their income tax returns because they don’t have enough other things to deduct like mortgage interest.


The Qualified Charitable Distribution helps with this problem by allowing you to take money out of your IRA and make a direct contribution to a charity.  The distribution counts towards your RMD and it’s tax free to you because it went to the charity.  That’s a win/win situation!


Another advantage to the QCD is that the income from the distribution never shows up as income on the face of your tax return.  This is really helpful for people who may be able to claim other deductions or benefits based on having a lover Adjusted Gross Income (or AGI.)  For example:  if you had enough medical expenses to be deductible, a lower AGI would allow you to claim a bigger deduction.


Can you make a contribution of more than your RMD?  Yes you can.  You can actually make a charitable distribution of up to $100,000 from your IRA with no federal income tax impact.  $100,000 – that wasn’t a typo.  If you’re in a financial position to make a donation like this, that would be $100,000 to a charity of your choice with no limitations as to its deductibility because it’s part of an IRA charitable rollover.


Can you make a QCD if you’re less than 70 and 1/2 years old?  No, I’m afraid not.  You must be at least 70 and 1/2 at the time you make the distribution.


If you’re interested in making a Qualified Charitable Distribution, talk it over with your financial advisor and your charity.  You’ll want to make sure that it’s done correctly and you’ll want to keep good records in case there’s ever any question about your RMDs.


Can I still take a charitable deduction on my tax return for my QCD?   No, the QCD will be exempt from tax so you can’t claim it as an additional deduction.