Required Minimum Distributions Update

Transcription

1 Required Minimum Distributions 2017 Update

2 Prior to age 70½, individuals benefit from tax-deferred growth and reduced annual income taxes by investing in an array of retirement accounts including Individual Retirement Accounts ( IRAs ), 401(k)s, and other employer-sponsored retirement plans. Retired or not, 70½ is the age when annual minimum payouts from many retirement accounts are mandated and taxed by the U.S. Treasury. These mandatory payouts are called Required Minimum Distributions ( RMDs ). Happy 70½ Birthday! Now it is time to take RMDs and pay the tax owed on the distributions. Much confusion surrounds RMDs and costly mistakes can be made in many ways. Any required amount not distributed is both taxed at ordinary income tax rates and penalized at a 50% rate. Information provided here can help you make smart decisions. When to Begin You have the choice in the year you reach age 70½ to take your first RMD by December 31st of that year or to delay it until April 1st of the following year. That April 1st is the absolute last date to begin taking RMDs from retirement accounts without being subject to a penalty. This delay is allowed only for the first year and wouldrequiretwormdstobetakeninthesameyear(onebyapril1andoneby December 31 of the same year). All following annual RMDs are required to be taken by December 31 each year. Which Accounts All traditional, SEP, and Simple IRAs as well as accounts in 401(k) and 403(b) plans are subject to RMDs. Keep in mind that annuities held in an IRA also will be subject to RMD rules. Roth IRAs held by the original account owner or by a spousal beneficiary through an inheritance are not subject to RMDs. However, it is important to remember that non-spouse beneficiary inheritors of Roth IRA accounts are subject to RMDs even though no taxes will be owed on the required distributions. 2

3 HowtoCalculate RMD calculations seem rather straightforward at first glance, but there are numerous pitfalls that can lead to errors and penalties. The key elements of the calculation are: the age to use for determining the IRS life expectancy factor; the correct IRS table to use; and the prior year s ending account balance as of 12/31. The first year can be further complicated because the correct age can be either 70 or 71. The easiest method to ensure proper age is to use either 70 if you were born between January 1 and June 30 or 71 if you were born between July 1 and December 31. The majority of account owners will use the IRS Uniform Life table. If your spouse is the primary beneficiary and he or she is more than 10 years younger, you may use the IRS Joint Life Expectancy table which will result in a lower RMD. Remember, the year-end balance to use for calculating the RMD is the prior year balance on 12/31. RMD Example Johnturns70onJune1,2017,sohereachesage70½onNovember1. Therefore,he has an RMD due for He can delay until April 1, 2018, but he chooses not to because he does not want to raise further his taxable income in 2018 by taking two RMDs that year. He has one IRA which had a balance of $650,000 on December 31, 2016, and his wife is two years younger. The calculation of his RMD is: RMD = 12/31/16 Balance IRS Life Expectancy Factor RMD = $650, = $23, This is the gross amount that must be distributed from the IRA. John can always distribute more but any amount less than the requirement will be subject to a 50% penalty. Aggregation You may have multiple IRAs either held at one institution or spread out among many. For IRAs, you may aggregate the year-end balances of the various accounts to calculate the total RMD due. This same aggregation rule applies separately to 403(b) plans as well. You may then take the RMDs from just one of the IRAs and one of the 403(b) accounts if you wish. However, you cannot aggregate 403(b) balances with IRA balances. A benefit of aggregation is that only one Form 1099-R is issued rather than many if you elect to take RMDs from each account. Aggregation rules do not apply to 401(k) accounts. If you have multiple 401(k) accounts, you must take separate RMDs from each one. You may be able to delay RMDs from a 401(k) account if you still are working past age 70½ and you are less than a 5% owner of the employing company. In addition, the plan must permit this delay. 3

4 Taxation Distributions, including RMDs, from IRAs (except Roth IRAs), 401(k)s and other employer-sponsored plans are taxed as ordinary income in the year in which they are received. However, if you made after-tax or non-deductible contributions, these amounts will not be taxed upon distribution as they were taxed prior to the contribution and serve as the cost basis. Keep in mind that RMDs are a gross amount. For instance, if you have a $25,000 RMD due (which is the total amount that must come out of the account) and you want to withhold 25% in federal taxes the net amount you would receive would be $18,750 while $6,250 would go to the IRS for federal taxes. In this example, you would not have to withdraw both $25,000 and an amount for taxes in addition. The RMD always will be a gross amount made up of the net amount to you and any taxes owed. Tax Efficiency For those fortunate enough to not need the full RMD amount for living expenses, there is a way to reduce taxes owed while still meeting the RMD. It is called a Qualified Charitable Distribution ( QCD ). A QCD allows an IRA owner with an RMD due to donate up to $100,000 directly to a qualified public charity. The amount is not considered taxable income but does meet the RMD requirement. QCDs are not an all-or-nothing proposition. You can utilize QCDs in combination with RMDs that you use for living expenses. Prior to reaching age 70½, you can convert portions of your IRAs to Roth IRAs and pay the taxes on the amount converted. This decreases the value of the accounts subject to RMDs, thereby reducing future RMDs themselves. Individual situations vary, so this strategy can be beneficial for some but not others and requires close examination. Inherited Accounts The rules for RMDs from Inherited IRAs are more complex than those for other distributions. Many of the same rules applicable to the original account owner remain, but there are modifications. Inherited IRAs have their own aggregation rules. The life expectancy factor is different and beneficiaries generally can base the distributions on their own life expectancies. Due to increased complexity, it is prudent to consult a professional regarding RMDs from an Inherited IRA. 4

5 Each year more individuals will be affected by RMDs. The rules are complex and there are steep penalties for mistakes. It pays to understand the rules. Working with a team of professionals who fully understand the ins and outs of this important area of retirement planning can provide peace of mind and potential tax savings. Do not hesitate to call us if you have any questions. 20 North Wacker Drive Suite 1820 Chicago, Illinois p: C H I C A G O D A L L A S North Central Expressway Suite 770 Dallas, Texas p: Schlindwein Associates, LLC. All rights reserved. No portion of this report may be reproduced in any form without prior consent. The subject matter contained herein has been derived from sources believed to be reliable and accurate at the time of compilation. Opinions are presented without guarantee. Treasury Department Circular 230 requires that we inform you that any discussion of U.S. federal tax issues contained herein and in any accompanying materials is not intended or written to be relied upon, and cannot be relied upon, by any person for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein or therein. 5