December 11, 2018 — December 31 is the deadline for taking a Required Minimum Distribution (RMD) from your 401(k) or IRA if you are older than 70 and 1/2 (but if you turned 70 and 1/2 this year you have until April 1). Fines for not doing so are steep – 50% of the required distribution not taken. Because it might take several days for your financial firm to handle the distribution, it is definitely time to make sure you do this now!
Tax savings available
For people with substantial income and retirement saving balances, the taxes on an RMD can be significant – because it is treated as ordinary income. If you already have pension, investment income, and Social Security income, the RMD could tip you into a higher bracket. But there is an easy way not to pay taxes on up to $100,000 of your annual RMD.
You can take a Qualified Charitable Distribution (QCD) by directly transferring funds from your IRA custodian to a qualified
charity. The QCD counts toward satisfying your required minimum distributions (RMDs) for the year, as long as meet some fairly simple requirements. So, let’s say your 2018 RMD is $20,000 -if you direct your custodian to send it directly to a qualified charity, that $20,000 will not count toward this year’s income. Last year’s tax bill has made this approach even more attractive, since higher thresholds for itemized deductions ($12,000 per individual) mean many people’s charitable deductions are not high enough to get them over the new threshold.
Your financial institution is ready to help
If you have a custodian for your IRA or 401(k) taking your distribution is easy. They do it every day so they will tell you how much you need to take out, how to make a QCD, and facilitate the whole transaction. But your responsibility is to make sure you tell them to do it by the deadline. Here is link to Fidelity’s webpages on Qualified Charitable Distributions and RMDs.
RMD %s start small and grow bigger
The required distribution percentage starts at 3.65% of your retirement assets at age 70 and goes to 15.87% at age 100. Many advisors believe that this approach makes a good way to take money out of your accounts and not run out of money in old age. Since the formula starts low and gets higher over time, it reduces risk and is safer than plans that take out steady amounts over time.
Comments? Have you had any problems calculating your required distributions, or other issues? Please share your thoughts in the Comments section below.
Text of IRS requirement:
“You must take your first required minimum distribution for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.”
There are some exceptions which allow some people who have not yet retired to delay their first RMD. See RMD FAQs at the IRS, or your tax professional.