Contributed by: Timothy Wyman, CFP®, JD
As tough as it is to admit, sometimes after practicing for 26 years I take things for granted. I should know better! One such instance was working with one of the firm’s long term clients facing their first Required Minimum Distribution (“RMD”) from her IRA. As our client shared, “Since neither of us have experienced this life experience before, we know nothing about it.” The good news is that The Center has been helping clients satisfy their RMD requirement and integrating it into their financial planning for years. What I forgot was that what may appear a routine exercise for us as professionals may not be for folks experiencing a RMD for the first time.
Center partner Laurie Renchik, CFP®, provides a quick outline of the rules in the following blog post: http://www.centerfinplan.com/money-centered/2013/2/7/the-magic-age-of-70-and-your-required-minimum-distributions.html?rq=rmd
While the rules may be considered somewhat straight forward – as usual there are many nuances. More importantly, sometimes the issue is simply how one actually takes the money.
Need the money for living expenses? We can transfer to your bank account or send a check. This can be done monthly, quarterly, or even as a lump sum during the year.
Don’t need the money? We can transfer the after tax amount to a taxable investment account and reinvest for future use. Remember, the tax man wants to get paid (via income tax withholding) before the transfer.
For example, Mary’s RMD amount is $20,000 and she is in the 25% marginal income tax bracket for federal income tax purposes. We would request a gross distribution of $20,000 and send the IRS $5,000 for income tax withholding and the $15,000 balance could be reinvested in Mary’s taxable investment account. I should note, the State of Michigan in Mary’s case wants their share and therefore we would withhold another 4.25% in most cases.
Additionally, while not necessarily a RMD rule, those over 70.5 and subject to a RMD may also consider how a Qualified Charitable Distribution (“QCD”) might be beneficial. My colleague Nick Defenthaler provides a great recap here:
The ease of giving and potential income tax benefits makes this an attractive option for many. While not a substitute for professional assistance, please find a summary of the major provisions for your consideration:
Donor Benefits of the QCD include:
Convenience: An easy and simple way to support your favorite cause
Lowers Taxable Income: The donor does not have to include the qualified charitable distribution as taxable income – whether the donor uses the standard deduction or itemizes deductions.
Ability to make larger deductible gifts: A donor is not restricted to 50% of adjusted gross income by using an IRA for charitable gifts. Therefore, a donor may make larger charitable gifts.
Income tax savings: The donor may save substantial income taxes not otherwise available due to deduction floors and phase-outs at higher income levels.
You have worked to save money for the future and tax deferral via IRA’s for most has been an important component. At age 70.5 IRS regulations dictate that a minimum amount must be withdrawn whether you actually need the money for living expenses. The Center is here to assist you in your RMD planning and to ensure that they are integrated into your overall retirement planning.
Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc.® and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.