By J.P. Dahdah, Founder & CEO of Vantage
The basics of required minimum distributions are straightforward
Each year IRA holders aged 72 and up must take out a percentage of their total IRA assets based on their life expectancy. The percentage increases every year. If you don’t take out the correct amount, the IRS penalizes you.
Preparing to take your mandatory IRA distributions can create some challenges. It’s important to review some frequently asked questions to gain clarity.
What IRA account will the Required Minimum Distribution be distributed from?
It is not uncommon to have accumulated multiple retirement accounts over a lifetime. By the time you reach 72, the first step is to identify which account should be used for that year’s distribution. Each year’s required minimum distribution is based on the fair market value of all IRA assets prior to December 31st. But unlike with required 401(k) withdrawals, an owner with multiple IRA accounts doesn’t have to take a proportional payout from each. Therefore, it makes sense to withdraw money unevenly if there is more cash in one IRA account over another.
When to take the distributions?
IRA account holders must take their RMD by April 1st of the year after they turn 72. After that, your deadline is December 31st. Some retirees prefer to take out monthly amounts to mimic a paycheck, social security, or pension payment. This strategy creates a fixed income stream which can be comforting to retirees. The tip here is to ensure the proper tax planning is done along the way. Retirees often owe quarterly estimated taxes, so you should consider what amount of taxes should be withheld to avoid a tax hit.
Will the IRA distribution be in cash or another form?
Many retirees do not realize or have been led to believe all IRA withdrawals must be taken in cash. This is not true. Sure, most IRA owners select to receive their payouts in cash because they need the IRA savings’ retirement income. Wealthier retirees who don’t need the money to live on can choose to take the distribution in-kind. This can help eliminate paying commissions and other fees often charged when assets are liquidated. Self-Directed IRA account holders who invest in LLCs, LPs, private notes, and real estate, often select the “in-kind” method of distribution.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) became law on December 20, 2019. How do these changes impact the RMD rules?
The SECURE Act pushes back the age at which participants need to take their RMD from 70 ½ to 72. In the year you reach age 72, you have until April 1 of the following year to satisfy your RMD requirement. For all subsequent years, you must take the RMD by December 31 of that year.
Should you make charitable gifts using the required distribution?
For philanthropic retirees seeking to donate retirement savings to causes that are dear to their hearts, IRS Publication 590-B is a provision that allows IRA owners to give as much as $100,000 in cash from IRAs charities and have the gift count as part of their RMD. The downside is you cannot deduct this IRA charitable contribution from your personal tax return. However, you still receive the tax benefit of the amount not being added to your adjusted gross income or AGI. Why is this a good thing? Because your AGI can be a trigger for several other tax provisions. It also is used to determine payments from certain Medicare premiums and taxes on Social Security income. So lowering AGI is a good thing! Just remember these charitable transfers are only valid once you’ve reached age 72, so make sure you are patient until then.
Regardless of your age, increasing your financial literacy regarding your mandatory IRA distributions is a great idea. As with all money matters, you are the only one who can determine the best way to take your required withdrawals. Money is Personal®. As you get closer to turning 72 it is important to remain curious about your options and evaluate the best outcome for your family and your retirement planning.
Happy investing!
Some of the rules around taxes and investments can be confusing and difficult to navigate. If you have questions or want to talk through the distribution or your RMD, contact us.