Required Minimum Distributions 101
Understanding mandatory retirement account withdrawals.

Provided by Marc Aarons

If you are approaching your seventies, get ready for required minimum distributions. You may soon have to take RMDs, as they are called, from one or more of your retirement accounts.

You can now take some RMDs a bit later in life, which is good. Recent rule changes give your invested savings a little more time to potentially grow in your retirement savings vehicles before that first required drawdown.

What account types require RMDs? Any retirement plan sponsored by an employer, plus traditional Individual Retirement Arrangements (IRAs) and IRA-based retirement plans, such as SIMPLE IRAs and Simplified Employee Pension plans (SEPs). Original owners of Roth IRAs do not have to take RMDs.¹

You can take your initial RMD from a retirement plan by December 31 of the calendar year in which you turn 72. You actually have the choice of taking that first annual RMD as late as April 1 of the following year, i.e., the year in which you will turn 73, but you’ll have to take your second RMD by December 31 of that same year. So if you wait 16 months to take your first RMD, you will end up taking both your first and second RMDs from that account in the same year – and since each RMD represents taxable income, that could lead to higher-than-anticipated tax bill for that year.¹

How are RMDs calculated? The Internal Revenue Service provides calculation formulas in Publication 590-B. Commonly, you calculate your yearly RMD by dividing the balance of your retirement account on December 31 of the previous year by a life expectancy factor, a number you take from tables published within Publication 590-B.¹

If you have multiple retirement accounts (as many of us do), each one will require an annual RMD calculation. If you own multiple traditional IRAs, you have the choice to calculate RMDs for each of those IRAs and take the combined RMD amounts for all three IRAs from just one of those IRAs. You have the same choice if you have multiple 403(b) plan accounts.¹

What do you need to do to avoid penalties with RMDs? The most important thing to do is to take them by the annual December 31 deadline. The second most important thing to do is to withdraw the right amount.

If you take an RMD after the December 31 deadline or withdraw less than you should, a penalty may apply. The I.R.S. may levy as much as a 50% tax on the amount not withdrawn.¹

The good news is some investment firms will update you on your upcoming RMDs well in advance of annual deadlines, and your RMDs may even be calculated for you. This is not a given, however, and even when you receive such information, you must act on it, because it takes time to authorize and execute the RMD.

Lastly, take a look at how the RMD income may affect your taxes. There are ways to manage the tax impact of RMDs, and you can explore those choices with a financial or tax professional.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com.

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MMI Disclosure: This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

^Citations

1. ^{Internal Revenue Service, March 16, 2022}

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Are you aware of them?

 Provided by Marc Aarons at Money Managers, Inc.

The federal government offers some major tax breaks for older Americans. Some of these perks deserve more publicity than they receive.

If you are 65 or older, your standard deduction is $1,300 larger. Make that $1,600 if you are unmarried. Thanks to the passage of the Tax Cuts & Jobs Act, the 2018 standard deduction for an individual taxpayer at least 65 years of age is a whopping $13,600, more than double what it was in 2017. (If you are someone else’s dependent, your standard deduction is much less.)¹

You may be able to write off some medical costs. This year, the Internal Revenue Service will let you deduct qualifying medical expenses once they exceed 7.5% of your adjusted gross income. In 2019, the threshold will return to 10% of AGI, unless Congress acts to preserve the 7.5% baseline. The I.R.S. list of eligible expenses is long. Beyond out-of-pocket costs paid to doctors and other health care professionals, it also includes things like long-term care insurance premiums, travel costs linked to medical appointments, and payments for durable medical equipment, such as dentures and hearing aids.²

 Are you thinking about selling your home? Many retirees consider this. If you have lived in your current residence for at least two of the five years preceding a sale, you can exclude as much as $250,000 in gains from federal taxation (a married couple can shield up to $500,000). These limits, established in 1997, have never been indexed to inflation. The Department of the Treasury has been studying whether it has the power to adjust them. If modified for inflation, they would approach $400,000 for singles and $800,000 for married couples.^3,4

 Low-income seniors may qualify for the Credit for the Elderly or Disabled. This incentive, intended for people 65 and older (and younger people who have retired due to permanent and total disability), can be as large as $7,500 based on your filing status. You must have very low AGI and nontaxable income to claim it, though. It is basically designed for those living wholly or mostly on Social Security benefits.⁵

 Affluent IRA owners may want to make a charitable IRA gift. If you are well off and have a large traditional IRA, you may not need your yearly Required Minimum Distribution (RMD) for living expenses. If you are 70½ or older, you have an option: you can make a Qualified Charitable Distribution (QCD) with IRA assets. You can donate up to $100,000 of IRA assets to a qualified charity in a single year this way, and the amount donated counts toward your annual RMD. (A married couple gets to donate up to $200,000 per year.) Even more importantly, the amount of the QCD is excluded from your taxable income for the year of the donation.⁶

Some states also give seniors tax breaks. For example, the following 11 states do not tax federal, state, or local pension income: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New York, and Pennsylvania. Twenty-eight states (and the District of Columbia) refrain from taxing Social Security income.⁷

  Unfortunately, your Social Security benefits could be partly or fully taxable. They could be taxed at both the federal and state level, depending on how much you earn and where you happen to live. Whether you feel this is reasonable or not, you may have the potential to claim some of the tax breaks mentioned above as you pursue the goal of tax efficiency.^5,7

 Marc Aarons may be reached at (714)887-8000 or Marc@OCMoneyManagers.com

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

^{MMI Disclosure}

 ^{Citations.
1 – fool.com/taxes/2018/04/15/2018-standard-deduction-how-much-it-is-and-why-you.aspx [4/15/18] 2 – aarp.org/money/taxes/info-2018/medical-deductions-irs-fd.html [1/12/18] 3 – loans.usnews.com/what-are-the-tax-benefits-of-buying-a-house [10/17/18] 4 – cnbc.com/2018/08/02/some-home-sellers-would-see-huge-savings-under-treasury-tax-cut-plan.html [8/2/18] 5 – fool.com/taxes/2017/12/31/living-on-social-security-heres-a-tax-credit-just.aspx [12/31/17] 6 – tinyurl.com/y8slf8et [1/3/18] 7 – thebalance.com/state-income-taxes-in-retirement-3193297 ml [8/15/18]}

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