Common RMD mistakes to avoid
During almost every retiree’s golden years they are faced with some choices regarding withdrawing a minimum amount per year from their retirement accounts. This is known as RMDs or Required Minimum Distributions. The information below summarizes and article I recently read in Investment News by Greg Icurci (Facts by a trust and estates attorney, Natalie Choate).
Ms. Choate highlighted a few common pitfalls during a keynote presentation at Investment News annual Retirement Income Summit in Chicago in May 2017.
- Deferring RMDs one year to late.
Individuals must begin taking annual distributions from their retirement plans at age 70 ½, but some individuals can defer taking their RMDs, such as those who are still working for a company of which they are less than a 5% owner. Their distributions from the company retirement plan can start after they retire.
TIMING IS KEY
If they were to roll an IRA into their company retirement plan, they wouldn’t have to take RMDs from those IRA assets until retirement.
The mistake becomes one of timing. Age 69 ½, not 70 ½, is the last year individuals can roll
money into a company plan without worrying about RMDs until they retire.
If the rollover is done too late, the person would have to take the first-year RMD from the IRA,
and can then roll the rest to the 401(k) plan.
- Taking from the wrong accounts.
Generally, people don’t have a choice when it comes to RMDs and the accounts to pull them from. If an investor has a 401(k), a 403(b) and an IRA, for example, the investor would have
to take an RMD from each plan, rather than aggregating the distributions and taking them all
However, there are exceptions. If you have multiple IRAs, you can mix and match from the IRAs.
In this case, investors can aggregate the IRA distributions from an IRA of their choice. Keep in mind, Inherited IRAs don’t factor into this equation – investors can’t mix these with personal IRAs for the sake of distributions, but must calculate those RMDs separately.
- Not using qualified charitable distributions.
Qualified charitable distributions became a permanent part of the tax code last year, and taxpayers can use them to satisfy all or part of the RMD from an IRA.
The Value of using this strategy, in which the distribution is made to a qualified charity, is that the distribution isn’t factored into adjusted gross income. The mistake here would be to take an IRA distribution, use that money for a charitable donation and then take an itemized deduction on income taxes instead of using the qualified charitable deduction.
To help avoid some of these mistakes retirees should contact their Financial Advisor and Estate planning attorney to help them formulate a plan of action for these distributions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.