IRA RMD? Try ABC

IRA RMD? Try ABC

Studies show more RMD’s (Required Minimum Distributions) are taken in the fourth quarter than the first nine months of the year.

What are RMDs?

Required Minimum Distributions (RMD’s) are familiar to almost anyone with a retirement account – 401K, 403B, 457, or IRA. RMDs are a minimum annual withdrawal requirement from the account. For your own account, they begin at age 72. For an account inherited before 2020, annual RMDs began right away. Both of these types of RMDs are calculated using IRS-provided tables. The company where you keep your account will calculate the RMD in January each year for you.

For an account inherited in or after 2020, there is no annual distribution requirement. Instead, the new requirement is to distribute the entire account within 10 years.

When to Take RMDs?

There are varied reasons people wait to take their RMDs. 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 not want to decide what investments to use to accomplish the RMD. All of these reasons can be perfectly rational reasons to delay.

Turning a Task into a Gift

Yet all of these reasons also focus on the RMD as a financial task to be accomplished.

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 financial task, it’s 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, this 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

The 2017 tax law means far fewer people itemize deductions now. 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 QCD – Qualified Charitable Distribution.

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, or 457s.

Before making the distribution, it’s a 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?

Holly Donaldson

Holly Donaldson, CFP® runs an hourly and fee-for-service financial planning practice virtually from her Tampa Bay, Florida office. She also works with clients throughout the U.S. (except Texas) interested in retirement and tax planning advice without product sales or investment management. Holly is the author of The Mindful Money Mentality: How to Find Balance in Your Financial Future (Porchview Publishing, 2013) and publisher of the award-winning monthly e-letter, "The View From the Porch."

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