Timing and Charitable Giving around your Required Minimum Distribution

October 09, 2019
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We get a lot of questions around timing of your Required Minimum Distribution (RMD) from your retirement accounts. Retirement account distributions are an important part of year end planning in our practice so we thought it would be timely to discuss before the holiday season is upon us or as 2019 draws to a close.

Important reminder: There is a 50% IRS penalty if your RMD is not taken, so it’s very important to work with an advisory firm that is focused on avoiding these types of issues.A 50% IRS penalty in anything certainly gets our attention!

First, let’s define a RMD. RMDs are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age. This distribution needs to be taken by December 31 each year, although the IRS gives a one-time exception the first year you turn 70 ½, allowing you to delay it until April 1stof the following year. If you are still employed with the company that sponsors your 401k, you are not required to take an RMD from that 401k if you are 70.5 or older. However, there are exceptions if you are a small business owner. If you are 5% owner in a business sponsoring a retirement plan, you do not qualify for this exception.

Now to the most common questions…

A popular question we get often is “When should I take my RMD? Monthly? Annually?” There is no right answer to this in our opinion. It depends on the client’s personal financial situation. Are they using it to supplement income? How is the health of the client? Sometimes taking it too close to the end of the year can be problematic if any processing issues arise. Again, there is a 50% IRS penalty if not taken. Additionally, if the client passes away, the beneficiaries have until December 31 of the year the client passes to distribute the remaining RMD. If a client passes away in November and still needs to take the RMD, the beneficiaries have a tight time frame to get it taken care of. However, the flip side is that if the client waits until the end of the year, they have more opportunity for tax deferred growth on these funds (dividends, interest, capital gains, etc).

Some of our clients who don’t use their RMDs for monthly income plan to use the annual distribution for significant expenses such as a new car, dental work, or home repairs/ improvements.  If we know that this will be the case, then we strategize around what to sell and when with a short time frame. This can often be a function of current or expected market conditions. 

Another common question is “Can I use it towards charity?” Yes, but you need to process any charitable contributions directly from the IRA. Meaning, you can’t process the distribution in your name, deposit it in your bank, and then turn around and cut the charity a check. For example, let’s say that you give every year to the Red Cross. If you send the funds directly out of your IRA to the Red Cross, you will not owe income tax on those funds and it counts towards your RMD. You can spread this out to as many charities as you like. The important thing to remember is the check must be directly processed from your IRA. A charitymust be a 501(c)(3) organization in order to receive tax-free IRA charitable contributions.We also suggest keeping records for your Tax professional.

Final Question, “Do Roth IRA’s have RMDs?” No. We work collaboratively with your Tax Professional to determine if Roth conversions make sense before you obtain the age of 70 ½.