Q: I will turn 70 ½ years old this year. I was told that if I keep working, I can wait to take my required minimum distribution from my IRA until I eventually retire. Is that really true?
A: Many people get confused by the rules for required minimum distributions (RMDs). Let me see if I can help clarify a few things.
First, the IRS requires that you begin taking minimum distributions from traditional IRAs and IRA-based plans like SEPs in the year you reach 70 ½ years of age. This distribution is required whether you are working or not.
The rules are a little different for employer sponsored plans like 401(k), 403(b) or 457(b) plans. For these plans, if you are still working and you do not own 5 percent or more of the sponsoring company, you can delay your RMD until you retire.
This difference in rules gives rise to an interesting tax strategy. If you are still working at 70 ½ and your 401k plan allows it, consider rolling your IRAs into your 401k plan. This will allow you to delay taking any RMDs until you retire. The longer you can delay taking RMDs, the longer your retirement savings will benefit from tax deferral.
Q: I understand that the deadline to take my first RMD isn’t until April 1 of next year. Should I wait until next year to take my RMD or should I take it sooner?
A: The deadline to take your first RMD is April 1 of the year following the year you turn 70 ½. RMDs for subsequent years are due by December 31 of each year, so if you delay your first RMD to its April 1 deadline, you will be required to take two RMDs in one calendar year.
Depending on the amount of other income you have, taking both RMDs in one year can have tax consequences even if your IRA is fairly small. A common tax consequence for small IRAs is to make more of your social security benefits subject to taxation. For larger IRAs, taking double RMDs might cause you to pay higher premiums for Medicare Part B coverage or push you into a higher tax bracket, causing you to pay higher tax rates on capital gains. It could even subject you to the phase-out of some tax deductions. To fully understand the impact on you, you would be wise to consult with your tax advisor. That said, most people are probably better off taking their first RMD by December 31.
Q: I was told I can donate my RMD to charity. Is that a good strategy?
A: It is true and, if you are charitably inclined, directly donating your RMD to charity is a great way to do your charitable giving. By donating your RMD directly to charity, you get the full tax deduction for your contribution, without having to recognize the RMD in your adjusted gross income. In order to be tax-free, the money needs to transfer directly from your IRA custodian to charity. If you take the withdrawal and then donate the money, you will still get the tax deduction, but the withdrawal will be counted as part of your adjusted gross income.
Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.