Getting ready for 70 1/2

Steve Merrell |

If you are 70 years old, you have probably already discovered that the IRS has special plans for you this year. They have been watching for years as you have socked away pre-tax money into your retirement accounts. Now, they are finally going to get some of the taxes you’ve been avoiding, by requiring you to take minimum distributions or RMDs from your retirement accounts.

Except for Roth IRAs started by you or your spouse, all retirement accounts are subject to the RMD rules. This includes your IRA, SEP IRA, Simple IRA, SARSEP IRA as well as accounts in 401k, 403b, and solo 401k plans. Even Roth 401(k) plans are not exempt from RMDs. Here are some points to remember as you begin to plan for RMDs.

1) RMDs begin the year you turn 70 ½ and are usually due by December 31 of each year. However, the IRS extends the deadline for your first RMD until April 1 of the following year. But watch out. If you push your RMD into the following year, you will end up taking two RMDs in a single calendar year which might have unpleasant tax consequences.

2) Your RMD for a given year is calculated using the value of your retirement account at the end of the preceding calendar year and a distribution period based on your age at the end of the current calendar year. For some people, the first RMD will be based on age 70 and for others it will be based on age 71.

For example, if you turn 70 in October of 2018, your beginning date for RMDs will be in April of 2019. In that case, your RMD will be based on the value of your account at the end of 2018 and your age at the end of 2019 (71). If you turned 70 in May of 2018, your beginning date would be November 2018. Your RMD would be based on the account’s value at the end of 2017 and your age at the end of 2018.

There are plenty of online calculators to help you, but be careful. If you use the wrong factor and take too little for your RMD, you will be subject to the 50% penalty tax on the shortfall.

3) If you have more than one IRA, you must calculate the RMD for each IRA separately, though you can withdraw the aggregated RMDs from a single IRA. If you have more than one 401(k) plan, you must calculate each RMD separately and withdraw the appropriate RMD from each account.

4) If you are 70 ½ and are still working, you do not need to begin taking RMDs from your 401(k) account, even though you must starting taking them from your IRAs. If you want to avoid RMDs while working, you can roll your traditional IRA into your company’s 401k—something called a “reverse rollover.” This only works if you own less than 5 percent of the company. Owners of more than 5 percent of their company must take RMDs.

5) After you turn 70 ½ you CANNOT contribute to a traditional IRA, although you can roll funds from other retirement accounts into your traditional IRA.

6) If you are 70 ½ and still working, you CAN contribute to your 401(k) plan, SEP IRA or Roth IRA. Roth contributions start to phase out at $189,000 for married-filing-jointly households and $120,000 for single payers.

7) Finally, if you want to give money to a qualified charity, you can make a qualified charitable distribution (QCD) directly from your IRA. The QCD satisfies your distribution requirement and you don’t have to recognize the distribution as income on your tax return. The 2018 limit on charitable distributions is $100,000. 

 

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to: smerrell@montereypw.com