Finance - HL 221 (1)

Helpful miscellaneous articles regarding our retirement plan and planning.  Like you, I review my retirement nestegg and plan from time to time.  Recently, I went though some continued education for some credentials I maintain and it occurred to me that we all could use a review about these issues.  So with your help, we will share and post articles and info that may be helpful and of interest to many of you in this section.

Minimizing Taxes on IRA RMDs

by Fraser Sherman, Demand Media

 

When you turn 70 1/2, you have to start making required minimum distributions every year from your traditional individual retirement account. If you inherit an IRA, you usually begin these distributions within a year of the owner's death. If you take out less than your required minimum distribution, or RMD, for the year, you pay a 50 percent fine on the rest. If your RMD is $4,000, say, and you only withdraw $1,000, you would pay $1,500 in penalties on the $3,000 you should have withdrawn.

Delay

You don't have to take an RMD the year you turn 70 1/2. Instead, you can postpone your first RMD as late as April of the following year, which also postpones having to pay taxes on it by a year. If taking the RMD in the first year would push you into a higher tax bracket, that may work out well. You will have to make the second year's RMD as well that year, so your income that year will be higher by that amount.

Rollover

Rolling over a traditional IRA into a Roth IRA results in a big tax hit now in return for lower taxes down the line. You pay tax on everything you convert to a Roth, except for any after-tax assets in the IRA. The Roth has no RMD, however, and any withdrawals you do make in retirement are tax free. If your Roth does well, the taxes you save on withdrawals may more than make up for the taxes you pay on the rollover.

Charity

If you're older than 70 1/2, using your RMD as a charitable donation eliminates the tax. Suppose your RMD for this year is $2,300: If you have the account manager send some or all of the money to the charity of your choice, there's no tax on the donation. If you're younger, Fidelity Investments suggests you combine rollovers and donations. If you roll over $10,000 to a Roth and donate $10,000 to charity, the write-off would cancel out the added income from the rollover.

Valuation

If you have unconventional investments in your IRA, it's important to value them accurately when you start taking RMDs. The RMD is based on the worth of your account, divided by your life expectancy on the Internal Revenue Service tables. Suppose your IRA invests in real estate: If the IRS decides the real estate is worth $10,000 more than you think, your IRA is worth $10,000 more to the IRS and you need a larger RMD than you actually took.

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(As with any of these informative articles, anyone who needs someone to talk to about

this very subject contact me and I can direct you to a knowledgeable advisor).

 


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