If I am 70 in November, when will I be required to make my first RMD, and can I avoid taking the initial withdrawal and the second withdrawal in the same year?
I’ll be 70 in November 2018 and I want to prepare for the required minimum distributions (RMD) that I will be required to take on the total amount ($450,000) that I have saved in two annuities and and in one 401(k) account. Is the process for RMDs different for annuity accounts and 401(k) accounts? For tax purposes, I'd prefer that the initial withdrawal and the second withdrawal do not occur in the same year, but I'm confused about the date that I am required to make my first withdrawal: is it 2019 or 2020? After the initial withdrawal, are all other withdrawals required by December 31 of the current year? Can any of the proceeds be invested in a Roth IRA account or do I have to use a brokerage account?
RMD's will work the same for the annuities and the 401k account. As you're turning 70 in November 2018, you will be 70.5 years old in May 2019. Therefore, your first RMD is for the year of 2019. For this first RMD, you would have until April 2020 to remove it from your account(s), but you'd still need to take the 2020 RMD by December 31, 2020. If you opt to take the delayed 2019 RMD in 2020, you would have two RMD's to claim as income in 2020. It sounds like you want to spread them out, so be sure to take the 2019 RMD by December 31, 2019.
All subsequent RMD's need to be taken out by December 31st of the current year. Only your first RMD is eligible to be delayed until April of the following year.
You cannot roll the RMD into a Roth IRA. However, if you have earned income, you can continue to make new Roth IRA contributions.
Thanks for your questions.
When you turn 70 this Nov., it means you will be in 70 ½ in April, 2019. Thus, your first RMD is by April 1, 2020. Having said that, you’re welcome to start the withdrawal early and ease your future tax burden, maybe just a bit.
Each financial institution has its own protocols, thus you must contact each one (your two annuity companies and 401k custodian) individually to find out the right procedure. Say, you want to make a withdrawal this year. You need to know the account balance at the end of Dec. 31, 2017, then divide the factor of 27.4, which is the factor for RMD withdrawal at age 70. That gives you a ballpark of how much you need to take out. Depending on each financial institution’s rules, you can make the request from each one. Ideally, if one has consolidated all IRAs/401k in one place, it reduces potential errors for under-withdrawal related tax and penalty issues. Also, keep in mind that if your spouse is 10 years younger than you are, it reduces the annual withdrawal amount.
Lastly, once you take out the money from the IRA, you can’t put it back to Roth unless you have an earned income. If you do, the maximum contribution to Roth is $6,500. You still need to invest the rest of the withdrawal in a taxable account. Hopefully you have a good financial planner who can help you design a portfolio with the maximum tax –efficiency in mind. Best!
Saving for retirement and investing in tax-deferred accounts like your 401(k)s and IRAs is extremely helpful to reach your retirement goals. However, once you turn 70 1/2, Uncle Sam definitely wants his share, so he forces you to take withdrawals from those accounts or face a 50% penalty of the amount you should have withdrawn.
If you’ve built up large balances in your 401(k)s, rollover IRAs or other tax-deferred accounts the first thing I would like to say is congratulations. You did a great job of working hard and saving so congratulations to you.
There is a potential problem approaching you that is right around the corner. Paying more in taxes than you have to. The thing to watch out for is getting bumped into a higher tax bracket. What? Let me explain. Now that you have large balances in your tax-deferred accounts and you have other sources of income such as a pension, investment income and Social Security, these are considered regular income by the IRS and will be taxed. These income sources and RMDs could potentially push you into a higher tax bracket. (By the way, let me know if you would like your Social Security to be taxed or not).
Unfortunately, many investors are NOT being educated enough in advance of their 70th birthday to avoid a very large tax bill. With that being said, I asked my friend and CPA, Tom Woulfe from Evans and Woulfe Accounting for his help with co-writing this important message. So, we put together 6 tax-smart strategies to reduce your RMD (Required Minimum Distribution).
Defer Taking Social Security Benefits
Defer taking social security benefits, which results in higher social security payments in future years. Instead, take IRA distributions for living expenses before RMD start when you turn 70 1/2. Then future RMD are lower since the tax advantage accounts’ balances are reduced.
Consider Qualified Charitable Contribution (QCD)
An individual age 70½ or older can make direct charitable gifts annually of up to $100,000 from an IRA to a public charity and not have to report the IRA distributions as taxable income on his federal income tax return.
Roth IRAs do not require RMD, so, consider converting your traditional IRA to a Roth before you reach 70 ½ to reduce RMD in the future. You can choose to convert your IRA assets to a Roth IRA at any time, even in retirement.
Qualified Health savings Funding Distribution (QHFD)
Take an IRA distribution to fund Health Savings Account (HSA) – A HSA if not used for Medical expenses, after age 65, can be used for anything. A QHFD is done by direct transfer from your IRA to your HSA.
Consider Rolling your IRA into 401K before age 69 1/2.
If you have a 401(k)s or 403(b)s you can put off taking RMDs if you’re still working. So, if you plan to keep working into your 70’s you may be able to let your 401(k) or 403(b) accumulate until April 1 following the calendar year in which you retire
Consider a Qualified Longevity Annuity Contract (QLAC)
Consider a Qualified Longevity Annuity Contract (QLAC) in your IRA which would be excluded from RMD calculation. This means that a person can take up to 25% of their overall account balances in their retirement plans but not more than $125,000 and use that money as premium to fund a longevity annuity contract.
Tom Woulfe from Evans and Woulfe Accounting and I have had many conversations to help investors make informed decisions before and during retirement. If you have not been educated about these strategies and you’re at a cross point maybe it’s time for change.
The rules are intricate and not everyone may benefit from each strategy, so it’s wise to consult with a financial advisor and tax professional if you are considering any of these options.
I would like to personally thank Tom Woulfe for his contribution to this important topic. We have been discussing this for a long time, and I greatly value his knowledge and experience.
Founder and President
Thomas Woulfe, CPA, Partner, Evans and Woulfe Accounting
Tom graduated from DePaul University with a Bachelor of Science Degree in Accounting in 1986, and became a Certified Public Accountant in the same year. Tom has over 25 years of accounting and tax experience in large and small corporate environments as well as public accounting. Tom joined Sharron in 2015 to create Evans and Woulfe Accounting, CPA firm.
Thank you for the question.
Since you are turning 70 this November, it means you will be 70 1/2 in April, 2019. Your first RMD is required to be taken by April 1st of the year after you turn 70 1/2 (2020 in this case). However, if you wait until 2020 to take your first distribution, you will also have to take a second distribution thta year. You have the option of taking your first withdrawal in 2019 to reduce your tax burden.
Each financial institution has its own rules. Generally, you are required, however, to determine your RMD. When you have accounts across multiple insitutions, you can choose to take the full distribution from one account, take it from two of the three accounts, or even use all three. You can generally withdraw what you wish from each account. The key is to make sure the combined amount withdrawn is equal to your balance as of December 31st of the year before the distribution is taken by the appropriate factor. In your case, if you want to take the first distribution in 2019, you can take the balance as of December 31, 2018 and divide it by 27.4 to determine your RMD for 2019. Also, keep in mind that if you are married and your spouse is 10 years younger than you, it reduces the annual withdrawal amount.
Unfortunately, once you withdraw money from your IRA, you cannot deposit it in a Roth account uless you have earned income. If you do, the maximum contribution amount is $6,500 annually. Please note, however, that you can also look to convert amounts in your 401(k) over and above your RMD into Roth IRA funds. You will pay tax on these amounts as well, but depending on your tax situation, there may be ways to reduce your tax liability by following this strategy. Additionally, once you are more age 70 1/2 or over, if you make charitable contributions, you can consider having such contributions made directly from your 401(k) account to an eligible charity. You can then exclude the distribution from income. While you will not get a charitable deduction on Schedule A for the distributed amount, the ability to exclude it from your taxable income may be more valuable.
Hopefully you have a good financial planner who can help manage your accounts with an eye toward tax efficiency.
I hope this helps.
Congrats on reaching the big 70! Now the real decisions need to be made--namely, what will be the lifetime impact of your $450k IRA required minimum distributions going to be on your Social Security income and your Medicare Part B premiums? Will those withdrawal amounts cause more of your Social Security income to be taxable than before? Will your Part B premiums increase? If so, how much, and for how long? Could this RMD be causing a domino effect of taxation each and every year?
It probably will, but it can also be avoided through proper planning. For tax purposes, I would not only look at when to take your withdrawals but also how to accelerate them and convert more money over now to a Roth IRA account. You probably have a bunch of other deductions that are available to you that are being underutilized.