Little identified guidelines and techniques for minimal required distributions of IRAs



Required minimum distributions (RMDs) from IRAs and other qualifying retirement plans are more complicated than necessary. There are a number of little-known rules that can be helpful to taxpayers or lead them to pay higher taxes or fines.

Most people believe that IRA stands for “individual retirement account”. However, the tax code and the IRS refer to them as “individual retirement plans”.

The basic rule for RMDs is that the owner (referred to as a subscriber) of a traditional IRA, 401 (k), or other defined contribution plan must start RMDs by April 1st of the year after age 72. However, if you turn 70½ years old in 2019, your first RMD must be taken by April 1st of the year after your 70th birthday. After the year you turn 72 (or 70½ for those who turned 70½ before 2020), dividends equal to the RMD must be made by December 31 of each calendar year.

Although the deadline for taking their first RMD is April 1st, most people should take their first RMD by December 31st of the year they turn 72. That’s because they have to take their second RMD by the end of next year. If you wait until April 1st to get your first RMD, you will have two RMD this year. This could potentially push them into a higher tax bracket, or increase the amount of Social Security benefits included in gross income, or increase the Medicare Premium Surcharge, also known as IRMAA.

The penalty for not receiving the full amount of your RMD is 50% of the amount that the IRA should have but not distributed. This penalty is in addition to income tax if the distribution is eventually made.

RMDs are not required for original owners of Roth IRAs or Roth 401 (k) s.

The method for calculating an RMD is explained in my previous article and in IRS Publication 590-B, “Distributions from Individual Retirement Plans (IRAs)”. The publication is available free of charge on the IRS website or from the IRS at 800-829-3676.

Of course, you can hand out more than the RMD amount if you want or need the money. However, the excess over the RMD will not be used as a credit or any other discount when calculating the next year’s RMD. Next year, you will use the IRA balance as of December 31 of that year to calculate RMD. So indirectly you will get a credit as a larger payout this year will reduce the IRA balance and the RMD for the next year.

RMDs do not have to be lumped at the end of the year. You can use RMDs in any pattern you want. You can make fixed installments or distributions at irregular intervals throughout the year. Some people have their IRA custodians mail them monthly checks equal to or greater than RMD for the year.

If you have more than one IRA, first calculate the RMD for each IRA separately. Then you have several options.

You can take the calculated RMD from any IRA.

Or, you can add all of the RMDs called aggregation. You can then take the aggregated RMD in any ratio from the IRAs. The total aggregated RMD can be taken from an IRA. It can be taken proportionally by everyone, or an equal amount can be taken from each IRA. Or whatever assignment you think of can be made as long as the grand total is at least equal to the total RMD for the year.

Some users use the aggregation method to rebalance their portfolios or to make managing their IRAs easier in the future.

For example, suppose one person owns two IRAs, and one IRA mostly owns stocks that have been highly valued, and another IRA owns other investments that have not been so well done. The owner can take all of the RMD from the IRA, which mainly owns stocks. This brings the owner’s overall asset allocation closer to what it was at the start of the year, so stocks are less overweight.

Other people choose to make their financial lives easier by reducing the number of their IRAs. So they take all of their RMDs from an IRA until it is depleted and can be closed.

The aggregation method cannot be used with 401 (k) s and other employment-related accounts. For them you calculate the RMD for each account separately and have to deduct the RMD from that account.

When you take an RMD, there is no need to sell any investment and hand out cash. You can distribute the IRA’s stocks or mutual funds or other assets that it owns. You need to ensure that the value of the property being distributed is at least equal to the RMD for the year. The value of the property at the time of each distribution is used to calculate the amount of distributions for the year and is the amount included in gross income. It doesn’t matter if the property’s value goes up or down after the distribution date.

If you make a property distribution instead of cash, your money will stay invested until you have to spend it.

If you are making a distribution of real estate, the tax base for the property is the fair value at the time of the distribution. When you eventually sell the property, you owe capital gains taxes only on the increase in value that occurred after the distribution.

You can spend or invest the RMD if the distribution was cash. You can give away the RMD after it’s distributed.

Some people want to put their RMDs in a different traditional IRA or a Roth IRA. However, there are limited circumstances in which you can do this. First, putting the RMD in another retirement account is not a tax-free rollover. You need to include the RMD in the gross income for the year.

The RMD amount can be used to make an annual contribution to an IRA if you meet the contribution requirements. A recently enacted tax law removed the ban on traditional IRA contributions after the age of 70. Now you can contribute to a Traditional IRA or Roth IRA at any age.

However, you can only make IRA contributions to the extent that you have earned an annual income from a job or self-employment. Therefore, most of the people who take RMDs cannot make IRA contributions with the proceeds.

Additionally, the annual IRA contribution limit applies, which is $ 7,000 in 2021 for taxpayers over 50.

If you want to convert all or part of a traditional IRA into a Roth IRA, you must first take an RMD for the year before you can convert an amount.

A Qualifying Charitable Contribution (QCD) may count for all or part of your RMD, but is not included in gross income. You can create QCDs up to $ 100,000 per year.