RMD Rules & Regulations

It’s hard to believe that another year is almost behind us. Year-end means a number of things for us at Fort Pitt. One perennial concern for our retired clients and clients who have inherited requirement assets is the matter of Required Minimum Distributions (RMDs).

A recent Pittsburgh Post-Gazette article in which I lent insight addressed this issue. You can read the entire piece here. In essence,  the required minimum distribution rule was put in place to ensure that retirement account owners  who have been accumulating tax-deferred assets will begin to use those assets for their intended purpose: to fund retirement. In the process the government will also begin to collect taxes on these assets, subjecting those withdrawals to ordinary income tax rates.

While retirement accounts permit you to access your retirement assets when you reach 59 ½ years of age, you are not required to do so. This changes in the year in which you turn 70½. At that time – and every year thereafter – you will be required by law to withdraw a specific amount from your retirement holdings. Failing to do so may result in significant penalties.

You do have some flexibility as to when you take the initial withdrawal. If you wish, you may forgo your first distribution until April 1 of the following year. You will, however, be required to take another distribution for the second year before year-end. For that reason, deferring your initial withdrawal is usually worth considering when you anticipate being subject to a lower tax bracket or needing additional income in that following year.

For many people, determining how much you must withdraw each year can be a source of considerable anxiety. We do this for our clients as a matter of course. The amount that must be distributed each year is based on the value of the account at the close of business at year-end divided by a government determined “divisor” that is based on the age of the investor. Fortunately, financial services firms are increasingly making it easier to know how much you have to withdraw each year by noting the amount of your RMD on your statement. However, if you have a spouse who is more than 10 years younger, that number may be overstated. The government recognizes that the money will be needed for a longer period of time and lowers the RMD “divisor” accordingly. It’s essential to check the requisite chart if you fall into this category. Here, too, we calculate this for each client account as part of our management of that account.

If you have multiple IRA accounts, you are permitted to aggregate the value of your various IRAs – in essence “bundling” your accounts to determine the combined value. You can then take the total calculated distribution from any one or more of the accounts as you wish. This approach might be useful when you have an IRA that holds a low yielding investment (such as a CD with a low rate) or, conversely, an investment that has done unusually well and might warrant profit-taking.

If you work for a non-profit and have multiple 403(b) accounts, you can also take the combined distributions from one or more of the accounts. However, if you have a 401(k), 457, 401(a) or profit sharing plan, you MUST take the distribution required from each specific account.

If you are over 70½, you may forgo taking your RMD if the following three criteria apply: 1. you are still working, 2. you are not a 5% or greater owner of the company or 3. you are participating in your company plan. In this case only, you may avoid taking a distribution until you retire.

One last tip: if you do not need the additional income and would like to benefit a 501(c)3 charity, you may want to consider a qualified charitable distribution. By donating your RMD directly to a charity you can eliminate the tax consequences that would otherwise result from taking the distribution while simultaneously supporting an organization or cause that you value. This provision allows you to do well while doing good.