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Required Retirement Plan Distributions - Rules, Questions, and Opportunities

December 2, 2019

BY SAMUEL A. DODSON, SIGNATURE FINANCIAL ADVISORS

 

Current federal income tax law requires a minimum distribution (“RMD”) be taken from your IRA or employer sponsored retirement plan (401k), 403(b), beginning in the year you turn 70 ½. There is an exception for employer-sponsored plan participants who are less than 5% owners and are still working. In this case, you can wait until retirement.

 

A second exception to the general rule allows you to delay the initial required distribution for approximately one year. In most cases it is not appropriate for taxpayers to elect this option, but we recommend that you meet with an RMA team member as soon as possible to determine if the exception is appropriate in your case.

 

Required distributions are calculated using the previous year end value of your retirement account(s). For example, the amount of the 2019 RMD is based on the value of the retirement account on December 31, 2018. The custodian of your IRA account or the administrator of a 401(k) plan would be able to provide this value. Some custodians offer to make the calculation for you. It is however your responsibility as a taxpayer to ensure the accuracy of the RMD.

 

Errors in the amount distributed could result in a 50% penalty. It is also very important to contact your custodian to ascertain the latest date to receive distribution instructions and be able to process your RMD so that it is taken in 2019.

 

The amount of any retirement plan distribution will generally be taxable as ordinary income. You may decide with your custodian or plan administrator to have the tax withheld or simply elect to pay it yourself.

 

Perhaps you have several IRAs and even more than one 401(k) plan from prior employers. IRS regulations provide that a taxpayer may aggregate the required distributions from several IRAs and employer plans and take the required distribution from one IRA or plan account. The rules for doing this are somewhat complex, and if this describes your situation, we encourage you to sit down with us or your advisor to help determine the appropriate strategy.

 

You may have set up your IRA so that required distributions are automatically taken during the year. If this is the case, we suggest that you make sure that your total distributions for the year are at least equal to the minimum required amount. This can help avoid the penalty discussed earlier.  Let us know if you need help with this.

 

Tax law has been amended to include what are known as Qualified Charitable Distributions (“QCDs”). QCDs have become the go-to tax break for charitably inclined IRA owners. With a QCD, a distribution from an IRA (normally taxable as ordinary income) is paid directly to an eligible charity, and the amount of the QCD is excluded from income. QCDs are in effect an increase to the standard deduction for those taxpayers who take the standard deduction and don’t itemize.

 

Sounds simple, right? As the old saying goes, “not so fast.” There are several exceptions and requirements for using QCDs. For example, you must be 70 ½ to qualify. They are also not available through a 401(k) plan, only an IRA. So contact us if you are considering an QCD so we can make sure you get the full benefit.

 

Hopefully, these thoughts can help as you plan the remainder of this year and start thinking about 2020. As always, we are here to be the resource you need for this type of planning.

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