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There’s a sneaky little provision in IRAs and 401(k)s that some retirement savers aren’t aware of. This provision is commonly referred to as required minimum distributions, or RMDs for short.

As the name suggests, you are required to begin distributing a minimum amount of money from your traditional IRA (not Roth IRA) and 401(k) accounts at a certain age. You’ll pay taxes on these distributions at ordinary income tax rates when they’re taken from your account.

RMDs Are Required, Not Optional

“But what if I don’t need the money yet?” you might be thinking. It doesn’t matter. You must take RMDs whether you need the money or not because the government doesn’t want you to keep funds in a tax-sheltered retirement account indefinitely. Failure to do so will result in a steep penalty of 50 percent of the amount of money that should have been distributed.

This makes it critical to devise strategies to help lessen the potential sting of RMDs. Here are six ideas to consider:

    1. Be sure you take your RMDs on time. You have until April 1 of the year after you turn 70½ to take your first RMD. So if you will turn 70½ on March 1 of this year, you don’t have to take your first RMD until April 1, 2020. After that, you’ll have to take RMDs by December 31 each year. In certain circumstances, it might make sense not to wait until the following April 1 to take your first RMD. For example, waiting will result in you having to take two RMDs in the same year, which could push you into a higher tax bracket. It could also subject you to the Medicare high-income surcharge if it pushes your adjusted gross income (AGI) above $85,000 if you’re single or $170,000 if you’re married and file jointly.
    2. Calculate your RMDs correctly. The amount of your RMD each year is based on the balance in your IRA or 401(k) account on December 31 of the previous year. This is then divided by the applicable distribution period or a life expectancy factor that’s based on your age. IRS Publication 590-B includes life expectancies tables that you can use for this calculation (scroll down to Appendix B).
    3. Take RMDs from the right accounts. RMD distribution rules are different for IRAs and 401(k)s. If you have more than one IRA, add up how much in RMDs must be taken from all your IRAs and then you can take distributions from the accounts in whatever amounts you choose. Conversely, if you have more than one 401(k), determine how much in RMDs must be taken from each one and then take RMDs from each account separately.
    4. Don’t take RMDs if you don’t have to. If you’re still working after you turn 70½, you generally don’t have to take RMDs from your current employer’s 401(k) plan. But you will need to take them from any 401(k) accounts you still have from former employers, as well as from your traditional IRA.
    5. Consider making a Qualified Charitable Distribution (QCD). This is a charitable giving technique that allows you to give up to $100,000 to a qualified charity directly from your traditional IRA. By making a QCD, you won’t have to pay income taxes on the distribution, and you may be able to deduct it on your tax return as a charitable contribution. The process for initiating a QCD is fairly simple. You will submit a distribution form to your IRA custodian and request that the check be made payable to the charity and sent directly to the charity, with no income taxes withheld. When completing your tax return, you’ll list the amount of the QCD on the line for reporting IRA distributions and enter zero on the line for reporting the taxable amount of the distribution.
    6. Convert your traditional IRA to a Roth IRA. Since there are no RMDs with Roth IRAs, this strategy will eliminate the need to take RMDs altogether. Keep in mind, however, that you’ll have to pay income taxes on the value of the IRA at the time of the conversion.

If your IRA is large, this could result in a big lump sum payment to the IRS when the conversion is made. Also, if you’re 70½ years of age or over when you make the conversion, you’ll have to take the current year’s RMD before you can complete the conversation.

Complex But Essential

Planning RMD strategies can be complex, but it’s essential in order to minimize the impact of potential taxes and penalties on your retirement finances. Give us a call if you have more questions about RMDs and how they could affect distributions from your IRA or 401(k).


The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's ("Frontier") investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.

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