It’s important to understand, prepare for, and comply with RMD requirements, especially from a tax and financial perspective.
Last posted at Allianz Life
The money you’ve accumulated in retirement savings plans won’t be tax-deferred forever. Required minimum distribution (RMD) rules apply to your individual retirement arrangement (IRA), 401(k), or other qualified retirement plans. A qualified retirement plan is an employer-sponsored plan that meets the requirements established by the Internal Revenue Code (IRC). It is important to familiarize yourself with these requirements to learn how they apply to your situation – especially from a tax and financial perspective.
When the owner of an IRA or the participant in a qualified retirement plan reaches age 70½, traditional IRAs and qualified retirement plans (like 401(k)s) generally require the owner or plan participant to begin taking annual distributions of a minimum amount from their IRA or retirement plan.
Special rules apply to someone who is still employed and who participates in a qualified retirement plan with their employer.
Timing, calculations, and responsibility
You can generally delay your first RMD payment until April 1 of the year following the year in which you turn 70½ or retire. For all subsequent years, your RMD is due by December 31 of the year. Technically, if you delay your first RMD between January and April 1 of the year following the year you turn 70½ or retire, you would be taking two RMDs in the second year.
If you don’t need your RMD, consider these options:
If you don’t rely on the RMD amount for your day-to-day living expenses, it’s helpful to know the possible places to contribute that amount – so you can make an informed decision regarding the RMD cash that can no longer remain in, nor be deposited in an IRA, 401(k), or other qualified plan.
Roth IRA conversions
When planning for future income needs you may want to consider converting some qualified funds into a Roth IRA. No RMDs are required of Roth IRA owners. A conversion may be appropriate if you have more money in your retirement plan than needed and your income tax bracket is projected to be the same or higher at the time RMDs are required. There are both advantages and disadvantages and it’s important to see your tax advisor for your own situation.
Qualified charitable distributions
Traditional IRA owners, and traditional and Roth IRA beneficiaries, who are at least age 70½, can make a nontaxable qualified charitable distribution (QCD) of up to $100,000 annually from their IRA and not pay income taxes on that distribution. If the distribution meets the QCD requirements, it counts toward the individual’s RMD for that year. To qualify as a QCD, many requirements must be met. Consult your tax advisor or local attorney for details.
It may be advantageous to contribute RMDs into a nonqualified tax-deferred annuity to obtain tax deferral, similar to the IRA (the RMD of course is taxable, but then can be used as an after-tax purchase payment). A nonqualified annuity is an insurance company’s product; you pay the insurance company premium or purchase payments – and in exchange you get benefits only an annuity could provide. Plus, annuities can help you transfer wealth to your beneficiaries. However, keep in mind that nonqualified annuities may have disadvantages such as fees and surrender charges.
It’s wise to plan ahead and prepare for RMDs to avoid any last-minute mistakes at year-end. If you miss the December 31 deadline or fail to withdraw the proper amount you may have to pay an excise tax to the IRS – up to 50% of the amount you didn’t take out.
- Determine your personal RMD deadline for qualified plans. If married, your spouse should also determine their deadline(s). Be sure to include IRAs, Roth IRAs, and qualified plans that you and/or your spouse inherited.
- Estimate the RMD amounts and whether you will use them for retirement income or set them aside for future savings or legacy plans.
- Consider various financial strategies and products for those RMDs you do not need for retirement income such as gifting, savings, nonqualified annuities, or other investing.
- Meet with a financial professional and tax advisor who have knowledge of the RMD rules and additional possibilities for your RMDs.