Required Minimum Distributions: What, When, and How
Written by Mike Miller, Sr. Partner & Sr. Private Wealth Advisor in in Ronald Blue Trust’s Greenville, SC office
Having been in the financial industry for over 40 years, I have noticed certain questions seem to get asked repeatedly. One area that I get a lot of questions on is the Required Minimum Distribution (RMD) from your IRA.
What is the RMD?
The IRS requires those who are age 72 (this just recently changed from the previous requirement of turning 70.5) or older to withdraw a certain amount from their IRA every year. This requirement is only for your traditional IRA, as the IRS has exempted Roth IRAs from this requirement. If you do not take the RMD, you will be subject to a tax penalty—in addition to the regular income tax—on the required amount you were supposed to withdraw.
The IRS provides many details of this requirement, including links to the newest calculation tables, on its website.
When is the best time to take my RMD?
You are required to start taking your RMD the year in which you turn 72, but you have until April 1 of the following year to satisfy that requirement. So, if you turn 72 in 2022, as long as you take your 2022 distribution by April 1 of 2023, you satisfied your 2022 requirement. However, don’t forget that you also have to take one more by the end of the year of 2023 for your 2023 distribution. It’s only this first year distribution that has the deadline of the following April.
One reason for delaying your initial distribution and taking two in one calendar year is if you retire at age 73. Your income tax bracket is potentially about to be lower because you aren’t working anymore. Delaying your initial distribution could possibly lower your tax liability on the RMD the year after you retire. As always, please discuss your options with your financial advisor, tax preparer, or other financial expert before making any withdrawals.
How do I take my RMD?
It’s a fairly simple and straightforward transaction. You just simply tell the custodian or your advisor that you want to withdraw funds, whether it’s $500 or $50,000. You will include the distribution on your tax return and pay taxes on it the year you withdraw it. Of course, that doesn’t mean you need to spend it right away.
We have many clients who have enough income coming in from perhaps a retirement plan and Social Security that they don’t regularly need the income. For those clients, we simply take out the RMD, send the taxes on the RMD to Uncle Sam, and then put the rest of it in their regular after-tax brokerage account.
Some clients ask if they can take out the RMD and put it into a Roth. Unfortunately, tax rules on the Roth accounts don’t allow this transfer.
Don’t forget that having both a Traditional and a Roth IRA creates flexibility in your tax planning. Always know your marginal tax bracket so you can plan which account to take money from for your living expenses or one-time purchases like a new car.
How do I know how much to take out as an RMD?
The RMD is based on the balance of your IRA. The IRS has set calculation tables on their website. These do change periodically, so you want to speak with your financial expert to be certain you are taking the correct amount. Your custodian should calculate the RMD for you too.
There are ways to legally (and strategically) lower the balance of your IRA which would also lower the amount of your RMD. But in doing this, you want to avoid what I call “tax bracket creep”—where you end up with an increase in income taxes, but not necessarily an increase in income.
One way to lower the amount of your RMD is to make a Roth conversion. Be careful with this option as there are other considerations in this process.
Another way to lower the amount of your RMD is to make some withdrawals from your IRA typically between the time you retire and the time you turn 72. There are so many moving parts to this so you will definitely want to have a professional look at what you are doing to make sure you don’t end up hurting yourself in taxes instead of helping.
What about the Qualified Charitable Distribution (QCD)—what is it and how does it work?
The QCD lets you take the Required Minimum Distribution and turn it into a gift to your church or your favorite charity. While the age requirement for the RMD recently changed from 70.5 to 72, the allowable age from the QCD did not change. It is still 70.5.
One advantage to this is because the money goes straight from your IRA to the charity, it doesn’t show up as taxable income to you. It doesn’t go into the calculation for your adjusted gross income.
You can do this as a lump sum each year, but you may want to have a conversation about your decision with the treasurer of your church/charity so they can be planning their budgeting accordingly–especially if it’s a small church and your contribution is significant.
The Required Minimum Distribution, while simple on the surface, can become quite complex when you start looking at all of the options and possibilities. If you have any questions about your RMD or QCD, please don’t hesitate to contact us at [email protected] or 1-800-987-2987.