Do I have to Start Taking Money From My IRA? - Alaska Permanent Capital Management


Do I have to Start Taking Money From My IRA?

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Kim-ButlerAs we have written about several times in the past, tax-deferred accounts such as pre-tax 401(k)s and IRAs are great retirement savings vehicles. They allow individuals to delay paying taxes until they are hopefully in a lower tax bracket.  In the meantime, the returns generated in these accounts are sheltered from taxes. Eventually though, the IRS requires individuals to start taking money out of the aforementioned retirement accounts and pay taxes. The magic age is 70 ½ and the distributions are called required minimum distributions (RMDs). The IRS is so serious about this, the penalty is 50% of the calculated distribution if you fail to take it in a timely manner.  Therefore, it is important to know when you must take your RMDs and how much to distribute in order to avoid the 50% penalty.

RMDs must start the year you turn 70 ½ and must be taken by December 31 each year thereafter. The RMD is re-calculated each year using the prior year-end account balance divided by a life expectancy factor obtained from an IRS table. Depending on where the IRA assets are held, the custodian may calculate this for you automatically each year.

While you can’t avoid taking your RMDs without the serious penalty mentioned above, Congress did recently permanently renew an option that can help alleviate the tax burden. This option is called a qualified charitable distribution (QCD). With a QCD, individuals over 70 ½ may be able to donate their RMD up to a limit of $100,000 from their IRA (excludes SEP-IRAs and SIMPLE IRAs) directly to a qualifying charity. In many cases this passes income-tax free to the IRA owner and may assist with planned annual giving.

One of the major analyses we do for our clients is a cash flow strategy that shows how to distribute assets in retirement to meet retirement income needs. This includes looking at estimated RMDs at age 70 ½ and trying to maximize tax bracket efficiency earlier in retirement in order to reduce the likelihood of the RMDs pushing clients into a higher tax bracket. With careful planning and coordination with your CPA, these required distributions can be effectively managed throughout retirement.

Kim Butler
Associate Financial Planner


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