What to do if you don’t “need” your RMD

When you open a 401k or traditional IRA, you are entering into an agreement with the government. Your account grows tax free, and you are allowed to deduct your contributions each year. When you are retired, or age 70 ½ or older, the money you withdraw from these accounts counts towards your taxable income. The risk with this “agreement” is that the government can change the tax rate. When you reach age 70 ½, you are required to take out a portion of your account. The amount you need to take out is calculated using a formula based on your age. If you don’t take out enough, or take it out of the wrong account, there is a 50% penalty. An option you have to negate the risk of the tax rate increasing, is to take your money out of traditional IRAs, pay the taxes and convert them into Roth IRAs. You should consult your tax professional if you want to see if this option is suitable for your situation.
Otherwise, if you don’t need your RMD, you can always reinvest it into a non-IRA account. You could give it to a charity, or you could use it to pay for a grandchild’s education.

Video Transcription

Hi, Vince Oldre here again to talk to you about required minimum distributions. What are required minimum distributions? Well they’re distributions that you have to take out of an account that you have not yet paid taxes on such as a 401(k), IRA, 403(b) or any type of retirement account that you have yet to pay taxes on. But you have to take out those distributions at a certain age, such as age 70 and a half.
If you do not take your required minimum distributions there’s a penalty and that penalty is quite steep. It’s 50%. I don’t know if that’s the largest penalty in the IRS tax code, but that’s pretty steep, so if you do have money in your 401(k) or IRA or any type of retirement account that you have yet to pay taxes on, you want to make sure that you have a plan as far as how much you need to take out every year for your required minimum distribution.
Now again, that has to be done by the time the year that you turn 70 and a half you must take out the required minimum distribution. Now there are some other rules that go along with that that can get a little bit more complicated. You can technically wait until April of the following year to take out your first required minimum distribution, but if you do that you’ll have to take out two required minimum distributions in that year because you’ll need to take out another one by December 31st of the following year.
Now I understand this can be a little confusing. We wrote an article or a blog just before this to try to help you go through it a little bit better, but there are some things that you can do to help eliminate your required minimum distributions before you get there. Some of those things are a Roth conversion or making the distributions earlier before you hit 70 and a half. There can be advantages to do that, but there can be disadvantages as well, so before you make any moves with your IRAs or 401(k)s or your 403(b)s or anything that you have yet to pay any taxes on, you want to make sure that you’re working with your financial advisor and a CPA or tax accountant. Sometimes your CPA and your financial advisor aren’t working together and if that’s happening there might be some financial or some tax mistakes you might be making within your own plan.
The other problem that we have with required minimum distributions is it could increase your tax level when you have to start taking those distributions. If that happens you want to understand what it might look like as far as an income tax. Again, you want to make sure that you meet with a tax attorney or a tax accountant or a CPA and make sure that you’re working with your financial advisor, but actually come up with a plan when it comes to having to take assets from or taking income from your retirement accounts like your IRAs, 403(b)s, thrift saving plans, 401(k)s. You’ll need to have a plan so you can take out that money most efficient as possible.
Now if you have any other questions, please feel free to message us and if you want to attend one of our educational workshops, please feel free to leave us a message or go to our events page on our website. Until then I look forward to speaking with you soon and I’ll see you next time.

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