Required Minimum Distribution
At the end of 2019 the IRS has made significant changes to the regulations regarding RMD’s. See below for a summary of the updates.
SPECIAL NOTICE: IR-2020-162, July 17, 2020 (IRS NOTICE)
WASHINGTON — The Internal Revenue Service today reminds seniors and retirees that they are not required to take money out of their IRAs and workplace retirement plans this year.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, waives required minimum distributions during 2020 for IRAs and retirement plans, including beneficiaries with inherited accounts. This waiver includes RMDs for individuals who turned age 70 ½ in 2019 and took their first RMD in 2020. Roth IRAs do not require withdrawals until after the death of the owner. For more answers to your questions go to: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers
What is a Required Minimum Distribution? (RMD)
IRS regulations require that owners of retirement accounts including IRAs and qualified employer sponsored retirement plans (QRPs) such as 401(k)s, 403 (b)s and governmental 457(b)s must begin taking distributions annually from these accounts. These distributions are refed to as required minimum distributions or RMDs.
Once you reach your required beginning date (RBD), you will begin taking RMDs from any Traditional, SEP, and SIMPLE IRAs that you have, as well as from any QRPs left at former employers. The RBD is generally April 1 of the year following the year you turn 72.
While the age for RMD’s was raised to 72, the age at which the supporters can start making Qualified Charitable Deductions (QCD’s) of up to $100,000/year remains at 70 ½. There is also no change for the charitable side of this means of giving. Additionally, a giver can just name their “Giving Fund” as the beneficiary of their IRA, so the charity gets the assets immediately with no tax due. A QCD, on the other hand, cannot go to a Donor Advised Fund (DAF) at a public charity established to handle charitable funds, such as a community foundation. However, it can go to RC’s Single Charity Fund at the National Christian Foundation (NCF). www.ncfgiving.com
Key Rules to Know
RMD rules can be complex and penalties for not complying with the rules can be significant. We strongly suggest you consult a financial advisor or your tax advisor for help. Consider these as general guidelines.
- Your RMD is calculated by dividing your account balance at the end of the previous year by the appropriate life expectancy divisor, based on your age as of 12/31, from IRS Life Expectancy Tables. Most IRA owners and plan participants will use the IRS Uniform Table to determine their divisor for the year.
- When your spouse is the sole primary beneficiary and is more than 10 whole years younger (meaning 11 years or more, not 10 1/2 for example) than you the IRS Joint Life Table can be used to determine the divisor.
- You have the option to delay your first RMD until April 1 of the year following the year you obtain age 72 but can take it sooner. Subsequent RMDs must be taken by December 31 of each year. You will owe ordinary income tax on the taxable portion of the distribution.
- If you do not satisfy all your RMD, you may be subject to a 50% IRS tax penalty on the difference between the RMD and the amount that you actually took.
- If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs.
- RMDs for Inherited IRAs must be satisfied separately from your other IRAs.
- Distributions from Roth IRAs do not satisfy RMD requirements.
- You cannot aggregate RMDs from all your QRPs. You have to take RMDs from each QRP you have. You cannot satisfy your IRA RMD from your QRP or vice versa.
Things to keep in mind
RMDs are taxed as ordinary income for the tax year in which they are taken. If you made non-deductible contributions to your IRA, you must calculate your RMD based on the total balance, but your taxable income may be reduced proportionately for the after-tax contributions.
It’s important to withdraw at least the RMD each year. If you do not satisfy all your RMD, you may be subject to a 50% IRS tax penalty on the difference between the RMD and the amount you’ve taken. You can take more than your RMD, however excess amounts taken will not offset the RMD amounts in future years.
GENERAL CONSIDERATIONS
Consult your financial advisor or attorney
Traditional IRA contributions cannot be made for the year you turn age 72 or subsequent years. If you are still working, contributions can be made to a SEP or SIMPLE IRA after the age of 70 ½. Roth contributions are allowed after the age of 70 ½ if you, or your spouse if filing jointly, have earned income. Modified Adjusted Gross Income (MAGI) limits apply.
You can convert to a Roth IRA once you are 72 or older, but it will be necessary to take your RMD prior to the conversion. You are not able to convert your RMD.
As you begin withdrawing your RMDs, you will need to decide how you’ll use this money. You are not required to distribute cash from the IRA to satisfy your RMD. Cash and/or securities can be distributed. Remember that these assets can be transferred to your non-retirement account, use it pay for expenses or send it directly to a qualifying charity, like Ratio Christi through NCF.
You can link to the Federal guidelines on the recent changes to RMD’s here:
PLEASE NOTE: Ratio Christi does not provide financial or legal advice, so we strongly suggest you check with your financial advisor or attorney, to determine if these IRS changes affect you and your financial planning objectives.
