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Navigating Required Minimum Distributions

When you are halfway through your 70th year on the planet, U.S. law says you must start taking money out of IRAs, SEPs and SIMPLE plans as well as 401(k), 403(b) and other U.S. Government qualified retirement plans. Only a Roth IRA account, which you fund with after-tax dollars, is exempt from federally-required minimum distributions (RMD).

From Uncle Sam's perspective, it's only fair to tax you; you avoided paying tax on money you placed in a non-Roth IRA account, and he wants his cut. From your perspective, it's time to maximize your life savings by paying as little as possible in income tax on your withdrawals.

When RMDs kick in at age 70½, not following the rules can cost you real money. With a bit of strategic financial planning, however, you can turn the rules to your advantage.

Here are five tips that can add up to substantial savings in navigating the withdrawal maze:

Delay your first payment. You don't have to make your initial withdrawal at the midpoint of your 70th year. You can delay it up to April 1st of the following year. So, if you hit 70½ in October 2019, you could delay your withdrawal to March 31st, 2020. The downside is that, in 2020, you must pay taxes on two RMDs. That second withdrawal must occur by year-end of 2020. Planning it matters!

Ask your plan custodian about how much you are required to withdraw. Firms like Fidelity and Vanguard will calculate how much you must withdraw. At age 70, in most cases, you must tap 1/27.4 of your account, based on a 27.4-year life expectancy of 96 and a few months, according to the IRS Uniform Lifetime Table. By the way, your required minimum distribution stays the same from January 1st through December 31st and does not fluctuate with the performance of your portfolio.

Where the money comes from in your account is up to you. You don't have to draw from every single fund you own to make RMDs. You could take equal amounts from every fund in your IRA, yes, but you can also withdraw from the best-performing funds. Similarly, if you own several IRAs, you could withdraw from each of them, or you can add up all of your assets from the separate IRAs and take a large single withdrawal from one of them.

Pay taxes later. Your plan provider can withhold whatever percentage amount you specify before distributing the remainder to you. That's easy, but it deprives you of the full use of your RMD. Alternatively, the provider could send you all the money intact. At tax time, you must pay what you owe the United States. Meanwhile, you have use of your entire RMD to invest with or whatever you want. Again, it just requires a little planning and the savings can add up when this tip is applied in concert with the other strategic planning tips on this list.

If you haven't left the labor force, you don't have to withdraw from your employer's 401(k) or other retirement plan. An exemption from RMDs is available if you are still working. To qualify for the "still-working exemption," you must own no more than 5% of the company for which you work and be employed throughout the entire year. While most qualified plans permit this exemption, it's best to confirm with your employer before doing so.

One caveat: The mandatory initial RMD age of 70½ is the subject of pending tax legislation and could be pushed back to age 72. It's a wrinkle to be mindful of in tax planning currently.

Implementing these tips requires knowing the rules regulating required minimum distributions and devising a strategic lifetime plan for maximizing retirement income in your personal situation. If you have questions or need a professional tax advisor, please call us with any questions.

This article was written by a veteran financial journalist. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results.