Once you reach age 70½, the IRS imposes required minimum distribution (RMD) rules that say you have to withdraw at least a minimum amount from your retirement plans each year or face stiff tax penalties. Since the withdrawals are considered ordinary income, planning in advance can help you prepare for the impact on your federal income tax return. Here are two suggestions to help you avoid surprises and avoid unnecessary costs.
- Make a list of your accounts.The rules require an RMD calculation for each plan. With traditional IRAs, including SEP and SIMPLE plans, you can take the total distribution from one or more accounts, in any amount you choose. You can also take more than the minimum. However, withdrawals from different types of retirement plans can’t be combined to meet the minimum distribution threshold. Say for instance, you have one 401(k) and one IRA. You have to figure the RMD for each and take separate distributions. Failing to take distributions from each type of plan, or taking less than is required, could result in a penalty of 50% of the shortfall.
- Pay attention to the date distributions must begin.The general rule says you must withdraw your RMD by December 31, starting in the year you turn 70½. The rules provide one exception: You have the option of postponing your first withdrawal until April 1 of the following year. This can be important if your RMD will increase taxable income enough to put you in a higher tax bracket. For example, if you plan to retire on your 70th birthday, which falls in the first half of the year, and you get a substantial retirement bonus. Postponing the first withdrawal until January of the next year can help you avoid a large increase in your income during the year you turn 70.
Delaying income can be a sound tax move. But because you’ll still have to take your second distribution by December 31, you’ll receive two distributions in the same year, which can increase your taxes. It’s important to plan carefully and know what to expect so that you won’t be hit with a higher tax bill than you may be prepared for, whenever you decide to take your first RMD.
Contact us before year-end to discuss your retirement plan distributions. We can help you create a sound plan that keeps you in control of your tax situation.
