In a Qualified 401(k) plan, a participant must begin Required Minimum Distributions (RMD’s) in the year he or she reaches age 70 1/2. This rule also applies to Pre-tax IRA’s. However, there is an exception to this rule when it comes to Roth IRA’s. This provides for a tax planning opportunity for those who have Roth 401(k).
If you have Roth deferrals in your 401(k) plan, and you want to decrease the amount of your taxable RMD, you can do a direct rollover of your Roth funds from your 401(k) to a Roth IRA prior to the year you turn 70 1/2. By doing this, you decrease the balance in your 401(k) plan, which in effect decreases your RMD from the plan. The Roth funds are now in a Roth IRA, which does not require distributions at age 70 1/2.
As an example, Participant A has a balance in her 401(k) plan at December 31, 2017 of $150,000. Of that, $50,000 is Roth, $100,00 is pre-tax. If she turns 70 1/2 during 2018, her 2018 RMD will be calculated based on the balance of $150,000. If, on the other hand, she does a tax free direct rollover of $50,000 to a Roth IRA during 2017, then her 2018 RMD will be calculated based on the December 31, 2017 balance of $100,000. This will reduce her 2018 taxable income. The $50,000 Roth IRA does not have Required Minimum Distributions. This $50,000 will continue to grow tax free until she is ready to take distributions.
If you have questions about this strategy, please contact Anne Christian at firstname.lastname@example.org.
If you are over age 70 1/2, you may be able to reduce your adjusted gross income (AGI) and receive a tax deduction for donating to your favorite charity. Generally, taking a required minimum distribution (RMD) from your traditional IRA increases your taxable income. However, you can choose to have your RMD send directly to a charity which is not included in your AGI. Even more beneficial, this good deed will qualify as a charitable contribution.
Much has been in the news regarding the new tax law and the increase in the standard deduction for 2018. For a married couple filing a joint return, this amount is $24,000. This means your itemized deductions, which include charitable contributions, would have to exceed $24,000 before you receive any benefits.
For a couple whose RMD for 2018 may be $40,000, they can decide to send any or all of the distribution to a charity. Choosing to donate $25,000 will allow them to itemize their deductions and only increase their AGI by $15,000. The limit on the tax free transfer to charity is $100,000 each year.
For questions or additional information, please contact Jaclyn Ellis, CPA at email@example.com of 314-576-1350.
Qualified retirement plans are intended to provide income to participants when they reach retirement age. Required minimum distributions (RMDs) are the distributions that must be made from the retirement plan in order to meet regulations and avoid significant penalties.
The IRS requires that participants who have attained age 70 1/2 and also own more than 5% of the company stock must begin to receive annual minimum distributions (RMD) from the retirement plan in the year in which he or she turns age 70 1/2. The IRS requires minimum distributions (RMD) from the retirement plan when a non owner participant attains age 70 1/2 and retires. The first RMD can be delayed until April 1st of the year following the year he or she turns 70 1/2. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.
The dollar amount must be distributed is determined by dividing the prior December 31 balance of the participant account by a life expectancy factor. The IRS has published three tables to be used to find the life expectancy factor, depending on the participant’s situation.
It is very important to pay attention to the deadlines for these distributions. The IRS has imposed steep fines for missed Required Minimum Distributions. If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.
Please contact Anne Christian, CPA if you have any questions about Required Minimum Distributions from a Qualified Retirement Plan.