Remember the first day you put money into your retirement account? You have seen your retirement account grow over the years and you have been blessed because you have never had to tap into it. Now the grand-kids are your new focus and you have decided to just pass it on them since you will never need it. You have just turned 70 and a friend of yours in a similar situation is griping because they had to pay taxes on their retirement plan because they had to take money out. Puzzled on the IRS rules you do some research (or go to my blog) and you learn about Required Minimum Distributions. We’ll call them RMD’s for short.

It’s Time To Take Your Distributions

The beauty of investing in retirement plans is the tax deferred growth. All these years you’ve seen your account grow but never had a 1099 you had to report any of those gains on. You planned well enough were you have prolonged withdrawing even longer now, but you can only hold out for so long. The IRS is chomping at the bit waiting to get some of that tax money back. They do so with RMD’s by making you take out a portion of your retirement account each year and pay the respective tax on it. If you don’t take it out, you get taxed 50% of the amount that you should have taken. That’s a pretty stiff penalty that you want to avoid.

RMD’s and 401k’s

Typically, the same required minimum distribution rules apply to your 401k as your IRA.   The big difference, however, is if you are still working until after you’ve reached 70.5.  In that case, the IRS allows you to postpone your RMD’s up until the day you retire.  That’s a good scenario for those that haven’t saved enough and continue to work to boost their retirement savings.

When do RMD’s  have to start?

The IRS says you must start by April 1 following the year that you turn 70 and a half, and you must do it each year ongoing. Some retirement plans will allow you to postpone withdrawing so long as you are still employed by that company. Keep in mind that April 1 is for the first year and the first year only. After the first year, it falls back to a calendar year schedule and must be withdrawn by December 31.

RMD Example

Somebody born on July 1, 1940 would not turn 70.5 until January 1, 2011. That means that they would not have to take their first RMD until April 1, 2012 (which would satisfy 2010 RMD requirement). They would, however, be required to take another distribution that year by December 31, 2011 to satisfy for that year. Each year following would follow the December 31^st deadline.

How much do you have to take?

The amount will also be based on the previous year’s balance in your retirement plan. For example, to figure your RMD for 2011 you would take the value of your plan as of December 31, 2010.

The amounts to be withdrawn are based of life expectancy tables issued by the IRS which factor in your age, your beneficiary’s age, and your relationship with your beneficiary. Based on the 2011 Uniform Life Expectancy Table, you can expect to be required to withdraw 3.65% of your retirement plan when you turn 70.5. It then increases to 3.77% the next year and increases each year ongoing. The IRS tables are named:

• Single Life Expectancy
• Joint Life and Last Survivor Expectancy
• Uniform Lifetime

The tables are helpful, but nowadays calculators are used to compute the amount with ease. Please seek guidance from a financial professional to ensure that you are taking your RMD’s correctly.

Do You Have to Calculate RMD’s on Your Own?

Luckily, no.  Most financial institutions will calculate the figure for you.   For all my clients that have reached RMD age, my custodian calculates the RMD amount for my clients and then I contact the client to notify them of the amount.

Another thing to consider is that since it is a taxable distribution, your IRA custodian will most likely require you to sign a form to take out the money (at least the first time).  If a form needs to be signed, don’t procrastinate and wait till the last minute.

What About RMD’s and Roth IRA Conversions?

With the rules regarding Roth IRA conversions now lifted, I’ve had several RMD candidates inquire about converting their RMD’s directly into a Roth IRA.   While the concept sounds good, it’s not allowed.  The IRS will make you pay tax and remove the RMD proceeds.  Anything left after the RMD can be converted into a Roth IRA – just remember you’ll have to pay the appropriate tax.

Investors are generally required to begin taking annual RMDs from IRAs and retirement plans upon reaching age 70 1/2.  Yet as a result of current market conditions, many investors may be reluctant to take their 2009 mandatory distributions.  In order to provide some relief to investors in this situation, the IRS has ruled that they may postpone their 2009 RMDs (Required Minimum Distributions), or take them and, in most cases, roll them over to an IRA or eligible retirement plan.

Am I Affected?

If you fall into one of the following categories, you are eligible to take advantage of this IRS ruling:

• You are already taking RMDs
• You are turning age 70 1/2 in 2009
• You are a beneficiary of an IRA or retirement plan

What Do I Need to Know?

• Generally, if you fail to take an RMD, the IRS will assess a 50% penalty on the amount not taken.
• The IRS has declared that any 2009 RMD (i.e., lifetime distribution that is determined by dividing an account balance by a distribution period) may be suspended without penalty.  This includes RMDs to retirement plan participants and IRA owners, and after-death distributions to beneficiaries.
• If you have taken your 2009 RMD, but decide that you do not want the distribution, you may be able to roll it over to an IRA or eligible retirement plan.  You must complete the rollover within 60 days of receipt in order to avoid immediate taxation.  IRA and retirement plan distributions are generally taxed as ordinary income.
• If you are a nonspouse beneficiary of an IRA, you may not roll over a 2009 RMD if you have already received the distribution.  If you do not want your 2009 RMD, you must inform your IRA administrator that you wish to suspend the amount.
• Your employer may, but is not required to, offer you a direct rollover option of your 2009 RMD from your 401(k) or other retirement plan.
• If the amount that would have been your 2009 RMD is distributed from your employer’s plan, the usual 20% mandatory federal withholding will not apply

What Action Should I Take?

• Contact your employer or IRA administrator to discuss what steps, if any, you need to take in order to suspend your 2009 RMD.
• If your employer or IRA administrator cannot suspend the RMD, talk to your financial advisor about a 60-day rollover to an IRA to avoid immediate taxation.
• Ask your financial advisor whether an IRA consolidation strategy would make sense for you in order to streamline the RMD process for future years.

Additional Details

• The average investor owns two or more IRAs.  If you own multiple IRAs and are in RMD mode, determining the correct RMD amount to take each year can be complicated.  Contact your financial planner and discuss ways to ensure that you are satisfying your RMD and effectively avoiding the 50% penalty for noncompliance.
• Some employer plans and IRAs may automatically distribute the 2009 RMD.  If you have already received or will receive a distribution, you may be able to complete a rollover of the amount within 60 days and avoid immediate taxation.
• If you turned 70 1/2 in 2008, but chose to delay taking your 2008 RMD until April 1, 2009, you must still take the amount.  You may not suspend this amount or roll it over into a separate account.  The suspension or rollover option only applies to RMDs for 2009.

Securities offered through LPL Financial, Member FINRA/SIPC

Required Minimum Distributions For Charities

Last week I had a reader e-mail me that is currently over the age of 70 1/2, and was required to begin his required minimum distributions. Being in a position where he didn’t really need the money, the reader was curious if he could take the full distribution and have it sent directly to a charity of his choice, thus having to avoid paying any income tax. My first thought was yes, because I had a client do such last year, but I thought I should dig a little deeper to make sure.

The Qualified Charitable Distribution

The Pension Protection Act of 2006 allowed what was called a qualified charitable distribution (QCD). The QCD allowed for the year’s 2006-2007 that one could take up to $100,000 out of their IRA and if it was sent directly to a 501(c) charity, then the individual would not have to pay the income tax. For those with the philanthropic heart, it was a very satisfying strategy to take advantage of.

Will The QCD Make Its Return?

Unfortunately, effective 2008 the Act did not continue and the qualified charitable distribution is no more. If one is still interested in giving to a charity, you would have to take the distribution from the IRA and then pay the corresponding tax. Then once donated to the charity, you could then deduct the proper amount on your itemized tax return. It’s not as appealing as the above, but still allows you to give with an incentive. As it stands, the Qualified Charitable Distribution still has life and may be seen again. Some expect for it to reinstated sometime down the road.

Update on 10/4/2008:
President Bush has signed the Emergency Economic Stabilization Act of 2008, which extends for 2008 and 2009 an expired provision permitting IRA owners, age 70½ and older, to make distributions to qualified charities of up to $100,000 per year (Tax Extenders and Alternative Minimum Tax Relief Act of 2008, H.R. 1424).

Remember the first day you put money into your retirement account? You have seen your retirement account grow over the years and you have been blessed because you have never had to tap into it. Now the grandkids are your new focus and you have decided to just pass it on them since you will never need it. You have just turned 70 and a friend of yours in a similar situation is griping because they had to pay taxes on their retirement plan because they had to take money out. Puzzled on the IRS rules you do some research (or go to my blog) and you learn about Required Minimum Distributions. We’ll call them RMD’s for short.

It’s Time To Take Your Distributions

The beauty of investing in retirement plans is the tax deferred growth. All these years you’ve seen your account grow but never had a 1099 you had to report any of those gains on. You planned well enough were you have prolonged withdrawing even longer now, but you can only hold out for so long. The IRS is chomping at the bit waiting to get some of that tax money back. They do so with RMD’s by making you take out a portion of your retirement account each year and pay the respective tax on it. If you don’t take it out, you get taxed 50% of the amount that you should have taken. That’s a pretty stiff penalty that you want to avoid.

When do RMD’s  have to start?

The IRS says you must start by April 1 following the year that you turn 70 and a half, and you must do it each year ongoing. Some retirement plans will allow you to postpone withdrawing so long as you are still employed by that company. Keep in mind that April 1 is for the first year and the first year only. After the first year, it falls back to a calendar year schedule and must be withdrawn by December 31.

RMD Example

Somebody born on July 1, 1938 would not turn 70.5 until January 1, 2009. That means that they would not have to take their first RMD until April 1, 2010 (which would satisfy 2009 RMD requirement). They would, however, be required to take another distribution that year by December 31, 2010 to satisfy for that year. Each year following would follow the December 31^st deadline.

How much do you have to take?

The amount will also be based on the previous year’s balance in your retirement plan. For example, to figure your RMD for 2008 you would take the value of your plan as of December 31, 2007.

The amounts to be withdrawn are based of life expectancy tables issued by the IRS which factor in your age, your beneficiary’s age, and your relationship with your beneficiary. Based on the 2008 Uniform Life Expectancy Table, you can expect to be required to withdraw 3.65% of your retirement plan when you turn 70.5. It then increases to 3.77% the next year and increases each year ongoing. The IRS tables are named:

• Single Life Expectancy
• Joint Life and Last Survivor Expectancy
• Uniform Lifetime

The tables are helpful, but nowadays calculators are used to compute the amount with ease. Please seek guidance from a financial professional to ensure that you are taking your RMD’s correctly.