Hamilton Herald Masthead

Editorial


Front Page - Friday, January 20, 2017

What should you know about taking RMDs?




As we get older, the end of another year takes on greater meaning, in many ways, than it did when we were young. And if you’re a certain age, December 31 has a very specific meaning in terms of your finances, because it’s the deadline for withdrawing money from some of your retirement plans. What should you know about these withdrawals? And how much control over them do you have?

Here’s the picture, in a nutshell: Once you turn 70½, you generally need to start taking withdrawals – the technical term is “required minimum distributions,” or RMDs – from your traditional IRA and your 401(k) or similar plan, such as a 403(b) plan (for employees of public schools, religious institutions and other tax-exempt organizations) or 457(b) plan (for employees of state and local governments and governmental agencies). After the first year in which you take these RMDs, you must take them by the end of each year thereafter.

If you don’t withdraw at least the minimum amount (calculated based on your age, account balance and other factors) you face a penalty of 50% of what you should have taken out – a potential loss of thousands of dollars.

So, here’s priority number one: Take your RMDs before the end of the year. The financial services provider who administers your IRA or 401(k) can help you determine the amount you must withdraw.

However, after that point, it’s your decision as to whether you want to exceed the minimum. Of course, you may need to take more out to meet your living expenses. But if you have enough additional income from other sources – such as Social Security and interest and dividend payments from investments held outside your retirement accounts – you may be able to stick with the minimum withdrawals. And this could prove to be beneficial, because you obviously want your retirement accounts to last as long as possible, considering you might spend two or even three decades as a retiree.

Another reason not to take more than you need from your retirement accounts is that these withdrawals are typically taxable – so the less you take out, the lower your tax bill.

You can also potentially lower your tax burden arising from RMDs by being generous. If you take money from your IRA and donate it to a qualified charity (one that has received tax-exempt status from the IRS), you can exclude the withdrawal from your adjusted gross income and count the donation against your taxable RMDs.

Suppose, for example, your RMD for 2016 is $5,500. If you take $5,000 from your IRA and donate it to a qualified charity, your taxable RMD obligation will be reduced to just $500. If you were to take another $500 from your IRA, you would satisfy your entire RMD for the year. (Consult with your tax advisor to make sure you’re following the rules governing these charitable donations from your IRA.)

You worked many years to build your retirement accounts. So when it’s time to tap into them, make the right moves – and do whatever it takes to maximize the benefits you get from your required minimum distributions.