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End-of-Year: Required Minimum Distributions

(posted: November 26th, 2017)

As the end of the year approaches, we like to remind everyone of things they can do now to make tax time easier, or things they must do before the end of the year to avoid penalties and fines.

Under the heading of "Must Do" you'll find "take required minimum distributions (RMDs) from your retirement accounts."

After you reach age 70 1/2 you generally must take RMDs from your:

  • IRAs (except Roth IRAs)
  • 401(k) or other defined contribution plans (the exception is if you are still an employee and not a 5% or greater shareholder of the employer)

You can defer your RMD in the first year, but then you'll have to take two RMDs the next year.

If you've inherited a retirement plan, the RMD rules generally apply to defined-contribution plans and to traditional and Roth IRAs. Special rules apply when the account is inherited from a spouse.

Huge Penalties

RMDs usually must be taken by December 31. If you don't comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didnít. That's just not worth it!

To Withdraw More or Not to Withdraw More?

That is an excellent question. On the one hand, taking only RMDs is to your advantage because of tax-deferred compounding. On the other hand, a larger distribution taken in a year when you fall into a lower tax bracket can lower the taxes you pay.

Some things to consider include the lost future tax-deferred growth and whether the distribution could:

  • Cause Social Security payments to become taxable
  • Increase income-based Medicare premiums and prescription drug charges
  • Affect other tax breaks that have income-based limits

Retirement plan distributions aren't subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), but they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

We are here to help! For more information on RMDs or tax-savings strategies for your retirement plan distributions, please Contact Us


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