It is that time of year again – no, we are not talking about the fast approaching holiday season, though, it is also that time of year again – it is Required Minimum Distribution (RMD) time. For those who are unaware, starting at your age of 70 ½ you are required by tax law to distribute a minimum amount annually from your qualified savings accounts (IRAs, 401ks, 403bs, SEP IRAs, SIMPLE IRAs, etc.). There are a few exceptions to this rule, but in general, the minimum distributions must start by April 15th of the year following the year in which you turn 70 ½ and continue by December 31st every year thereafter until the qualified savings are exhausted. It is an important rule to understand and follow due to the potential tax consequences involved. A person who fails to distribute their required amount before the annual deadline is subject to a 50% tax penalty on the undistributed amount in addition to ordinary income tax.
A person’s Required Minimum Distribution is calculated based on one of three life expectancy tables according to IRS Publication 590-B.
- Uniform Lifetime Table – most common table used for original IRA owners
- Joint Life Expectancy Table – used by an original IRA owner whose spouse is more than 10 years younger
- Single Life Expectancy Table – used primarily by non-spouse beneficiaries
Under current IRS regulations, the first year’s required minimum distribution amounts to roughly 3.65% of a person’s aggregate qualified savings (again, with a few exceptions). There is a proposed regulation currently being vetted by the United States Treasury and IRS that would lower this starting distribution amount to 3.44% in consideration of longer life expectancy. And, while there is no guarantee the new regulations will go into effect, we believe they ultimately will, which should be good news for retirement savers.
Some people distribute enough from qualified savings throughout the year to satisfy – or more than satisfy - their required minimum amount well before the end of year deadline. However, in our experience most of our clients either put off taking their distributions or simply forget that they are required to distribute anything until the end of the year. Ozanne Financial Services closely monitors our clients’ required minimum distributions and, beginning in November, contacts clients who have yet to meet their requirements. Conversations with our clients typically include the following decision points:
- Tax withholding: Since distributions – including the required ones – from qualified savings result in ordinary income taxation on distributed amounts, many clients prefer Federal and State Income taxes withheld from the distributions and receive the net amount. Withholding, though, is optional.
- Charitable Intent: The IRS allows people to donate any or all of their required minimum distributions directly to charity (up to a $100,000 annual limit) and avoid the taxation on the donated amount. We encourage our clients to satisfy their charitable intent with their required distributions to the extent possible.
- Method of Distribution: Clients have several options for receiving their required distributions. Some choose to receive their distributions via a check or direct deposit to their bank account. Some choose to reinvest their distributions in a non-qualified investment account for continued growth. As discussed previously, some choose to gift their distributions to charity. Still others choose a combination of options – as long as the distribution from the qualified savings is affected the method is at the discretion of the client.
Required minimum distributions can be a complicated event for people – especially those who have multiple and varied qualified savings accounts. We are here to help. If we can be of assistance, please do not hesitate to reach out to one of our advisors.