Recently, we published an article entitled “Taking RMDs from Retirement Accounts.” We discussed the basics of taking required minimum distributions from your retirement account(s). In the following, we wanted to expand on the basics and give you a few more tips. Remember, if you are at least age 70 1/2, you must start taking RMDs from most retirement accounts. Basically, every retirement account, aside from a Roth IRA, must be taken into consideration.
Qualified Charitable Distribution
Not everyone needs the money from their retirement plans once required minimum distributions start. If this fits your situation, you’re still required to withdraw the money, plus you’ll owe taxes on the amount withdrawn. This is because all traditional plan withdrawals are treated as taxable income.
However, there is a way to avoid the taxes and do some good. You can donate your withdrawal to a charity. This rule is known as a qualified charitable distribution. You simply alert your custodian to donate the RMD amount to the charity of your choice. This way you are not on the hook for the taxes that would be owed from the distribution. Please note that this can only be done with an Individual Retirement Account (IRA) and not a 401(k) plan.
Spouses and Required Minimum Distributions
If both you and your spouse contribute to a retirement plan, it’s important to remember that each spouse must satisfy their own RMD. You cannot decide to take both spouses’ distribution from one retirement plan. As we mentioned in our previous article, IRA required minimum distributions must be calculated for each IRA. However, you can choose to withdraw the amount from either one IRA, or across multiple plans. 401(k) distributions must be taken from each 401(k) you own.
Therefore, if both you and your spouse have an IRA, you each must take your own IRA. These is true for Spousal IRAs as well. A Spousal IRA is utilized when there’s only one working spouse. That spouse can contribute to an IRA in the non-working spouse’s name. Even though the working spouse is the one contributing, the non-working spouse must satisfy his or her own RMD. Be sure to consult with a tax professional to make sure you are satisfying your required minimum distributions the correct way!
Make Sure You Have Enough Cash
One last thing we failed to cover in our previous article is to make sure you have enough cash in your account to take your required minimum distribution. This is especially true if you have alternative assets in your plan. Afterall, if all your retirement funds are invested in an asset like real estate, it’s hard to turn that into cash at the last minute.
This information is specifically aimed at those who have not reached the required starting age of 70 1/2. If you are between ages 65 and 70, this might help you when you do reach that age. The approximate amount of your first required minimum distribution is about three percent of the IRA value. If your Self-Directed IRA is worth $1 million, expect to withdraw about $30,000. It’s essential you take the proper steps to ensure you have enough liquid assets to satisfy the amount.
For example, if all your IRA funds are tied to a real estate property, you might need to sell the property so you have the cash to take your RMD. Obviously, you can’t sell a room of the house to take your RMD. If you have raw land, you might be able to sell part of it, assuming subdividing is allowed.
This goes for any type of illiquid asset. If you can’t sell an investment quickly to take your RMD, you might get stuck paying a penalty if you fail to take your entire RMD. This serves as a warning to anyone nearing age 70 1/2. Be sure you can take your RMD when the time comes! Remember, you first RMD is not due until April 1, the year after you turn 70 1/2. If you do wait until the calendar changes, you will owe two RMDs that year.
Required Minimum Distributions – Conclusion
Required minimum distributions are mandatory for almost all retirement accounts. Preparation is the key to avoid penalties and, in some cases, taxes. Speak with your financial advisor to make sure you are taking the correct amount from the correct accounts.