Oct 29

Dealing With RMDs in Your IRA

If you have a traditional IRA, you enjoy tax-deferred savings…that is until you reach age 70 1/2.  Once there, you are required to start withdrawing from the account, whether you need the money or not.  These are what’s known as required minimum distributions, or RMDs.  Here we’ll tell you what you need to know about them.

First off, why are they required?  When contributing to a traditional plan, you do not pay taxes on those amounts each year.  Instead, the taxes are deferred until you withdraw from the account.  However, some people do not need the money during retirement or they want to leave it to a beneficiary.  The government thinks you’ve avoided paying taxes long enough, so when you turn 70 1/2, you must start withdrawing money from your IRA and paying the taxes on that amount.  Failure to take the full RMD will result in a hefty 50% penalty on the amount that should’ve been withdrawn plus interest.

Don't forget to take your RMD from your IRAWhen taking your first RMD, you have until April 1 of the year after you turn 70 1/2.  Each subsequent RMD must be taken by December 31.  Like all distributions from the IRA, RMDs are treated as ordinary income which may effect your tax rate.  This is especially true if you push your first one into the following year.  You still have to take your next RMD by the last day of the year meaning you would have taken two RMDs which could greatly effect your taxes and tax rate.

Now, how do you figure out your RMD?  You must take the December 31 ending balance of each IRA you own and divide it by your life expectancy factor as found in Appendix C of IRS Publication 590.  The IRS also provides a worksheet you can use when figuring out your RMD.  Lastly, FINRA provides a calculator you can use as well.  Even though you have to figure out the RMD from each IRA you own, you do not have to take the amount from each plan.  You may opt to take the total RMD from one account.  This can be a poor performing account or one that needs rebalancing.

It’s important to note that if you have 401(k) plans, RMDs must be taken from each account individually.  It’s a good plan to rollover your old 401(k)’s to an IRA and only maintain one 401(k) plan if you are still working.

Lastly, here are a few strategies you can utilize to lessen the effect that RMDs will have on you.  If you are already 70 1/2, one thing you can do for this year is a qualified charitable distribution, or QCD.  You can make a cash donation of up to $100,000 to an IRS-approved public charity.  It can be taken from your IRA as part of your RMD but it will not be included in taxable income.  This option probably won’t be extended into next year, so if you don’t need the money, you can help out a deserving charity.

Another option is to convert your traditional assets into a Roth IRA.  You pay the taxes on the amount converted, but there are no RMDs on Roth plans.  Note that beneficiaries to a Roth will have RMDs later on.

Finally, you can start to draw down your account before you reach age 70 1/2.  Once you are age 59 1/2, you can start withdrawing from your retirement plans penalty-free.  Withdraw as much as you can without pushing you into a higher tax bracket so that your account balance is less and therefore your RMDs won’t be as much.

RMDs are a fact of retirement savings, so make sure you are prepared for them when the time comes.  The tax experts at the IRA Financial Group can help you figure out the best plan when it comes to your retirement.  Give them a call @ 800.472.0646 or visit their website today!

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Jan 30

Qualified Charitable Donations

Section 208 of the American Taxpayer Relief Act of 2012, (P.L. 112-240) (the Act), enacted Jan. 2, 2013, extended application of Internal Revenue Code section 408(d)(8), reauthorizing qualified charitable distributions (QCDs) made during 2012 and 2013.  Here are some QCD examples to help navigate those rules.

Pre-Act QCD Made

An individual retirement account creator made an IRA distribution payable to a charity that would have qualified as a QCD, but for the absence of legislation extending the availability of QCDs after Dec. 31 2011.  Pre-Act QCDs made at any time during 2012 now qualify.  Some wrote $100,000 in checks from their IRAs directly to qualifying charities during 2012, just in case Congress would retroactively extend QCDs.  Because Congress did so, those checks qualify as 2012 QCDs.

Contributions Made After RMD Withdrawal

An IRA creator-taxpayer withdrew $100,000 of 2012’s required minimum distribution in December 2012; he made $100,000 of charitable contributions in December 2012 after the IRA withdrawal.  He may designate up to $100,000 of December 2012 QCDs as 2012 QCDs made out of the 2012 RMD. In addition, all of 2013’s $100,000 QCD is available.

Contribution Made After IRA Withdrawal

An IRA creator made $100,000 of 2012 IRA withdrawals during December 2012.  He made $100,000 of charitable contributions in January 2013.  The January contribution can be treated as a 2012 QCD out of those December 2012 withdrawals.  In addition, all of 2013’s $100,000 QCD limit is available.

Automatic Withdrawals Made

An IRA creator and IRA custodian agreed to automatic quarterly withdrawals totaling the 2012 RMD.  The last quarterly RMD was made during December 2012.  The IRA creator may, by January 31, 2013, make a cash contribution of up to $100,000 out of the December 2012 quarterly distribution.  That amount will be treated as a QCD.

Effect of DOMA

Each of two spouses wishes to make a 2013 QCD.  Each has a $100,000 limit; the limit applies to individuals and isn’t affected by marriage.  This means the federal Defense of Marriage Act doesn’t affect their QCDs. .

RMD Not Taken in 2012

A taxpayer didn’t take $100,000 of 2012’s RMD before Dec. 31, 2012.  During January 2013, he can designate up to $100,000 in charitable contributions as 2012 QCDs.  In addition, all of 2013’s $100,000 QCD limit is available.

2013 Withdrawal Made in January

A taxpayer withdrew $100,000 of 2013’s RMD in January 2013.  Charitable contributions made before the withdrawal occurred may not be designated as QCDs.  Nor may January 2013 contributions made after the withdrawal occurred. But all of 2013’s $100,000 QCD limit is still available for future use any time during 2013.

These are just a few examples, check out a more comprehensive list right here.  If you need help handling your donations or have any other IRA related questions, feel free to contact the tax experts at the IRA Financial Group today!

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