Individuals who deposit pre-tax funds into an Individual Retirement Account (IRA) or employer-sponsored 401(k) retirement account are required to begin withdrawing a minimum dollar amount each year once they reach age 70 ½. The Internal Revenue Service (IRS) requires investors to begin taking money out to ensure these tax-deferred savings ultimately become taxable! This is the ‘Required Minimum Distribution’ (RMD).
When do I take my RMD?
You must begin taking your RMD starting with the year you attain age 70 ½. If you turn age 70 during the first six months of the year, you will be 70 ½ in that same calendar year and will be required to take an RMD for that year. If your birthday falls in the second half of the year, you will turn 70 ½ in the next year, so your first RMD will be due in the year you turn age 71. Technically, you have until April 1 of the year following the year you attain age 70 ½ to take your first distribution. However, we usually recommend taking the first RMD by December 31 to avoid taking two distributions in one year.
How much is my RMD?
RMD is calculated each year using your year-end account value divided by a life expectancy factor. Life expectancy factors are determined by the IRS and can be found in IRS Publication 590-B.
Click here for a link to IRS Factor Tables: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
What are the tax ramifications of taking the RMD?
Taking money out of your IRA account is a taxable event. Whatever amount you take out of your IRA is added to your taxable income.
What are the tax ramifications of NOT taking the RMD?
Simply put, failing to take your RMD from your IRA or 401(k) can result in one of the IRS’ highest penalties—a 50% penalty on any shortfall from your required minimum!
Can I avoid having my RMD count towards my taxable income?
Yes! The way to avoid having your RMD count towards your taxable income is by taking a Qualified Charitable Distribution (QCD). A QCD is exactly what it sounds like; a charitable gift to a qualified charitable 501(c)(3) organization. Basically, you instruct your IRA custodian to disburse a check from your IRA in the name of the charity instead of yourself. A QCD can be for some, or all, of your RMD up to $100,000 per year.
How is a QCD different than simply writing a check to my favorite charity?
Ordinarily, to take a tax write-off for a charitable gift you have to itemize your deductions. However, the 2017 Tax Cuts and Jobs Act essentially doubled the standard deduction to $24,000 (married couples) and eliminated many personal deductions. Therefore, the vast majority of Americans will no longer be itemizing deductions and will be taking the standard deduction instead. A QCD, on the other hand, comes right off the top of your taxable income. In other words, the amount you give to charity via a QCD is NOT included in your taxable income, thereby avoiding taxes while still taking the standard deduction!