IRA Required Minimum Distributions & Tax Strategy

 

Learn how you can structure your IRA required minimum distributions after you turn age 70 ½ to better serve your retirement years and after you transition…

 

Many retirees who reach age 70 ½ are required to begin to make withdrawals from their retirement accounts in accordance with the IRS guidelines. 

 

Those who are not working would normally pay their taxes (estimated taxes) in April—June—September and the following January on a continuous cycle until their transition.   For those who continue to work after age 70 ½ they may be able to avoid paying estimated taxes by withholding their taxes at the appropriate level on their W-2.

 

To avoid the IRS penalty for underpayment of taxes you have the option of paying 100% of your previous year taxes through estimated payments (previous year tax divided by 4) on April—June—September and the following January or you can pay 90% of your current year taxes. 

 

You can also choose to have your taxes “voluntarily” withheld by adjusting your W-4P for your pension income.

Even your social security benefits can be "voluntarily" withheld by you electing to have taxes withheld (use form W-4V) at varying percentages such as 7%, 10%, 15% or 25% of your monthly benefits.

 

If you receive income from your traditional IRA you have more flexibility.  You can choose to have no withholding, otherwise 10% will be withheld by law.  At the other end of the spectrum you could tell your IRA custodian to withhold 100%.

 

IRA distributions are considered made evenly, regardless of when you receive them during the year. 

You could choose to receive your IRA distributions yearly if you are able to live off of your other income sources—say November or December and have an amount withheld that could cover the taxes that you owe from all of your other taxable income (must be over age 70 ½).

 

To effectively use this strategy (avoid the underpayment of taxes penalty) your RMD or required minimum distribution must be large enough to cover your taxes that would be owed. 

You would avoid having withholdings on your other income, avoid writing a check for estimated taxes every 3 months or so and make life less stressful by doing so.

 

Conclusion

 

The strategy that you use will affect not only you but your heirs as well. 

It is important that you give serious attention to how you will receive your retirement income after you turn age 70 ½ as you have the opportunity to structure your income in a way that can minimize your tax bite or make the payment of your taxes more convenient.

 Non-spouse Beneficiaries

Also give serious consideration of what will happen to your retirement income after you transition. 

If you are married the process is simpler, however if you have non-spouse heirs in the picture you don’t want to trigger a large tax bill for them by not knowing what may occur after you transition.

 

Non-spouse beneficiaries of “any age” who want to stretch the IRA over their own “life expectancy” must start the RMDs the year following the year the owner of the IRA transitioned.

 

Non-spouse heirs will have to pay tax on distributions of deductible contributions and earnings from a traditional IRA.

 

Even though non-spouse ROTH IRA owners will not feel a tax bite, they still must begin taking RMDs.  If they fail to do so a 50% penalty could apply on the amount that should have been withheld for the year. 

If you miss the RMD for the year in question you can still possibly avoid the penalty by emptying the account within 5 years of the owner’s death.

 

The size of your ROTH IRA and the age of your intended beneficiary will come into play and you must plan accordingly at this time to help minimize or eliminate the penalty for your intended beneficiary(s).

 

Also realize that non-spouse beneficiaries cannot roll an inherited IRA over into their own IRA. 

A separate account must be set up with a title that includes the deceased name and the fact that the account is for a beneficiary(s).   Also have the non-spouse heir name successor beneficiaries on the newly titled account(s).

 

If a number of non-spouse heirs are involved it is important that they “split the IRA” so that the money can continue to grow tax deferred, otherwise the age of the oldest beneficiary will be used to calculate RMDs which would shorten the growth period of the IRA. 

To be valid the split must occur by December 31^st of the year following the IRA owner’s transition.

 

If you decide to leave your IRA with a charity or multiple non-spouse beneficiaries including a charity or other non-person entity that entity must receive their share by September 30^th following the year of the owner’s transition.

 

If that share isn’t paid out you will create a problem if a non-spouse beneficiary(s) is involved. 

The entity must be paid out and the account must be split (mentioned above) otherwise your beneficiaries will have to empty the account  within 5 years if the owner transitioned before his or her required beginning date for taking distributions.

 

If the owner died after their RMD date the beneficiary(s) must take annual RMDs based on the deceased life expectancy, as noted in IRS tables.

 

If a trust is involved the process works a little differently as the IRA custodian must receive a copy of the trust by October 31^st of the year following the year the owner transitioned. 

If the IRA custodian does not receive a copy of the trust in a timely manner the trust will be considered a non-designated beneficiary and the payout rules mentioned above would apply to the trust.

 

Although a lot about RMDs has been discussed, it is important that you process and apply what may be relevant to you and your family at this time.

Be sure to discuss required minimum distributions and tax strategy and plan with your family and other professionals ways that you can have favorable outcomes.

By doing so you can lessen your taxes, make your heirs life less stressful and build your wealth more efficiently.

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