Got an RMD? Think ABC. Studies show more Required Minimum Distributions (RMDs) are taken in October – December than the first nine months of the year. What could be the reasons for delaying?
What’s an RMD?
What’s an RMD? Required Minimum Distributions (RMD’s) apply to anyone with a retirement account – 401K, 403B, Thrift Savings Plan, 457, or IRA (but not Roth IRAs). RMDs are a minimum annual withdrawal requirement from the account. If you haven’t started them yet from your own retirement account, they begin at age 73 or 75 depending upon your birth year.
- Born between 1951 and 1959 – age 73
- Born 1960 or later – age 75
Annual RMDs also apply to non-Roth retirement accounts inherited from someone else. If the account was inherited prior to 2020, annual RMDs had to start right away.
For accounts inherited in or after 2020, there is new guidance on the annual distribution requirement. In addition, the entire account must be distributed within 10 years of the date of death unless the beneficiary is a spouse or certain other kind of beneficiary. Check with your CPA or tax planner to learn how the new guidance applies to your situation.
Why Wait Until the Last Minute to Take RMDs?
There are varied reasons people wait to take their RMDs. Some include:
- They may not need the income and prefer to keep the money invested all year.
- They may not be comfortable with the logistics of requesting it from the company holding the account (called the “custodian”).
- They may want to wait to decide which investments to sell to accomplish the RMD.
All of these reasons can be perfectly rational reasons to delay.
Turning a Task into a Gift
For these reasons, the RMD can feel like a financial chore. It’s one more item on the annual financial to-do list.
Unless the RMD is a significantly large amount, any financial strategy involving the “best” timing of it is purely a guess. Rather than viewing it as a chore, could it be possible to turn it into a memorable or even fun opportunity?
Try these A-B-C ways to make a Required Minimum Distribution more intentional, or something special.
A is for Anniversary
Especially if you inherited the account, taking the RMD on the anniversary of your loved one’s loss can be a way to remember the gift they left you.
If it’s from your own retirement account, consider taking it on the anniversary of your last day at work!
B is for Birthday present
Whether it’s your own money or inherited, what about using the RMD during your birthday month to do or buy something special only for you?
With most custodians, the RMD can be set up as an automatic distribution to your checking account. Imagine, you open your bank account on your birthday and, voila’, birthday money to spend as you like.
C is for Charitable donation
Since the 2017 tax law, far fewer people itemize deductions. To maintain the tax-favored status of a donation, sending all or part of an IRA RMD directly to a qualified charity can be a wise move. This is called a Qualified Charitable Distribution – QCD.
There are several rules to keep in mind, though.
First, you have to be at least 70 1/2 years old.
Second, do not distribute to yourself first and then donate it. The donation must go directly from your account to the qualified charity.
Next, QCDs can only happen from IRAs, not employer retirement accounts like 401Ks, 403Bs, Thrift Savings Plans, or 457s.
Before making the distribution, it’s good practice to contact the charity to make sure they qualify. For example, donor advised funds and some private foundations will not be eligible for a QCD donation.
Conveniently, some custodians provide a checkbook for IRAs. If you are going to do QCDs, you might call this your “Charity Checkbook.” Be sure to write the check in plenty of time for it to clear before December 31.
Using your RMD this way can be both financially and emotionally valuable. You might get a deduction you otherwise would not. Plus, you get to see the impact of your gift on a cause you care about. Ask your CPA or tax planner whether it would work for you.
ABC Combinations
Some people combine two of the three ABC’s. They might give a direct charitable donation as a birthday present to themselves, or donate the RMD in memory of their loved one on their loss anniversary.
Whether you are taking them now or will in the future, be intentional about RMD’s. Rather than feeling like a last-minute task of the year, use the requirement to make some fun or meaningful memories.
Reach us here to talk more about year-end tax planning.
What year-end tax tips do you have? Share in the comments below.
