By Theresa Fry, Senior Vice President and Manager, IRAs, Retirement and Education PlanningPrint This Post
As we get older, it seems like the days pass more quickly and that somehow time moves faster. Science would say that isn’t true, but if you are like me, you might be realizing that there are just 49 days to take care of everything you wanted to get done before the end of the year. Yes, the end of 2019 is just 7 weeks away!
Between now and December 31, we will be sharing with you our list of “Financial To-Dos” – reminders of strategies you may want to consider before the year is over. Our first in this series of year-end financial to-dos covers frequently asked questions about required minimum distributions (RMDs) and qualified charitable distributions (QCDs).
Am I required to take an RMD if I am still working?
If you’re age 70½ or older and own a traditional IRA, SEP IRA or SIMPLE IRA, you will be required to take your RMD whether you are still working or not. If this is your first year for RMDs, you can take your RMD either by December 31st or no later than April 1st of next year. If you don’t take your first RMD this year, you’ll have to take both your first and second year RMDs next year. Make sure you consider the income tax impact of taking both in the same year before you decide to delay. RMDs for all subsequent years must be taken before the end of the year.
RMD rules also apply to savings in employer-provided retirement accounts, like a 401(k) or 403(b), but special rules apply that may allow you to delay the start of your RMDs. If you do not own 5% or more of the company that sponsors your retirement plan, you are able to delay RMDs until you retire or no longer work for the employer.
Also, if you have an IRA that you inherited from anyone other than your spouse, you typically must begin RMDs no later than the year following the year of the original retirement account owner’s death, although RMDs may also be required in the year of death in certain circumstances.
Can I convert my RMD to a Roth IRA?
No. RMDs are not eligible for rollover into another IRA or employer’s retirement plan, nor can they be converted to a Roth IRA in a rollover/conversion. However, if you are age 70 ½ or older and you have already taken your RMD for the year, you can convert any remaining amounts in your traditional IRA to a Roth IRA.
If I give my RMD to charity, do I have to pay taxes on it?
RMDs are generally included in your taxable income. However, if your RMD meets the requirements to be a qualified charitable distribution (QCD), then the distribution is tax free. A QCD is a direct gift out of the IRA to a qualified charity of amounts up to $100,000 a year. It will not increase your taxable income and therefore does not increase your adjusted gross income and can be a tax-efficient strategy even if you do not itemize. A QCD can only be made from traditional IRAs (not 401(k) or other employer-sponsored retirement plans, including SEP and SIMPLE IRAs) and you must be age 70 ½ (6 months past your 70th birthday) at the time you make the gift. Not all charities qualify, so check with your tax advisor or the charity before you take the distribution from the IRA to make sure it qualifies.
If I want to do a QCD, can I take out more than the amount of my RMD?
Yes. You can withdraw up to $100,000 a year tax free from your IRA as a QCD.
If I inherited an IRA, can I do a QCD with my RMD?
That depends. In order to qualify as a QCD you must be at least age 70 ½ at the time the gift is made. If you are, then you can treat your inherited IRA RMD as a QCD. If you are younger than age 70 ½, then you cannot do a tax-free gift from your IRA as QCD. However, if you take the RMD and then gift it to a charity, you may qualify for a charitable income tax deduction. Discuss this strategy with your tax professional to see how the charitable contribution will impact your taxes.
Additional year-end financial to-dos will be coming to you over the next 7 weeks. The clock is ticking so make sure you talk to your Benjamin F. Edwards financial advisor soon if you would like more information about RMDs or QCDs.
Benjamin F. Edwards & Co. does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.