Don’t Be Fooled By RMD Rules: The IRS, Taxes and Retirement Accounts
Under the usual rules, taxpayers who have reached age 70½ are obligated to begin taking lifetime RMDs from their traditional IRAs (but not Roth IRAs) and employer-sponsored plans like 401(k) plans on an annual basis.
Mar. 06, 2019
The IRS is reminding retired taxpayers that an important date is coming up: April 1, 2019. No, not because it’s April Fool’s Day. This date is important for some retirees because it’s the deadline for receiving required minimum distributions (RMDs) from IRAs and qualified retirement plans for the 2018 tax year (IR-2019-29, 3/5/19).
The IRS news release pertaining to RMDs is part of a new series, called “Tax Time Guide,” that is designed to assist taxpayers. You can pass along this valuable information to clients.
Under the usual rules, taxpayers who have reached age 70½ are obligated to begin taking lifetime RMDs from their traditional IRAs (but not Roth IRAs) and employer-sponsored plans like 401(k) plans on an annual basis. The amount of the required distribution is based on life expectancies of beneficiaries and the account balance at the end of the prior year. The RMDs are taxable in the year in which they are received.
Generally, you must take an RMD before the end of each tax year. In other words, you have until December 31, 2019 to withdraw an RMD for the 2019 tax year. But a special tax law provision permits you to withdraw the funds as late as April 1 of the year following the year in which you turn age 70½.
For example, a taxpayer who turned age 70½ on July 1, 2018 has until April 1, 2019 to take the initial RMDs from IRAs and qualified plans for the 2018 tax year. However, the taxpayer then still has to take RMDs from IRAs and qualified plans for the 2019 tax year before January 1, 2020.
The IRS is further advising taxpayers concerning two strategies that can provide some tax relief from the RMD rules.
1. Double tax payments: As discussed above, a taxpayer who has reached age 70½ and delays RMDs until April of the following tax year effectively must take RMDs for two tax years in the same tax year. This can often result in a higher tax than the amount that would be owed if RMDs were taken in separate tax yeses.
To avoid this scenario, a taxpayer can arrange to time distributions to his or her tax benefit. For instance, a taxpayer who turns age 70½ on December 1, 2019 can withdraw RMDs for the 2019 tax year by December 31, 2019 instead of waiting until April 1, 2020. This avoids a double tax payment in 2020.
2. Still working exception: The IRS also allows you to postpone RMDs from qualified plans if you are still working full-time and you don’t own more than 5% of the company sponsoring the plan. Say that you’re a long-time officer at a company and continue to come into the office 30 hours a week. In this case, you can delay RMDs, even if you’re in your seventies.
But note that this “still working exception” only applies to qualified plans like 401(k) plans. You’re required to take RMDs from traditional IRAs regardless of your work situation once you’re past age 70½.
Inform your clients about these rules and strategies so they can manage RMDs for the maximum tax benefits.