Last-minute tips for those facing Dec. 31 retirement plan RMDs
Monday, December 19, 2022
If you read my December tax moves post a couple of weeks ago, thank you. Now I'm here to reiterate one of those end-of-year actions.
Take your required minimum distribution.
That sentence makes sense to older readers who used tax-deferred retirement accounts, such as a traditional IRA or traditional 401(k) workplace plan, to save for retirement.
But Uncle Sam doesn't want to wait forever to collect on that money that's been accruing without his intervention. That's why he, and the Internal Revenue Code, demand you take some money out when you get older.
RMD refresher: How much older? Current tax law says you must meet the tax code's required minimum distribution, or RMD, rule when you turn 72. Under prior law, some savers have been dealing with RMDs since they celebrated their 70½ birthday. (Love those half candles; don't you?)
Whichever septuagenarian group you're in, you most likely* must withdraw a certain amount of your tax-deferred savings by year's end or face a severe penalty. That added cost is a steep 50 percent of the RMD amount you failed to withdraw. (*And more on those who aren't most likely in a minute.)
Your annual RMD is based on your tax-deferred account values at the end of the previous year, your age, and is calculated using life expectancy figures in special Internal Revenue Service tables.
If you or one of your older relatives you're spending time with over the holidays is facing an RMD in less than two weeks, here are some tips on taking out that mandated money.
Postponing your first RMD: Now for the promised * elaboration. If you turned 72 this year, you don't have to rush to meet the Dec. 31 due date. And in 2022, the deadline actually is Dec. 30, which is Friday, the last business day of the year for account managers who must make the payouts. You can postpone your first RMD until April 1 of the next year. In 2023, that deadline actually is April 3, since April 1 is on Saturday.
If you're still working into your seventies, you also can postpone RMDs from a workplace tax-deferred plan — 401(k), 403(b) and 457(b) plans; profit-sharing and other defined contribution plans; and defined benefit plans — until April 1 of the year after you retire.
Note, however, that this delay means you'll have to take two distributions in one tax year, the prior year's postponed amount and the one for next year due by that Dec. 31. This could bump up your overall income, affecting not only your federal (and state, if applicable) taxes, as well as your Social Security and Medicare costs.
As my grandmother would have said if she focused on taxes, it's six of one, half a dozen of the other when it comes to paying the tax collector.
Taking RMDs from multiple plans: If you have multiple IRAs, you must calculate the appropriate RMD for each one.
But you can take the total of all those separate IRA RMDs from just one individual retirement arrangement.
As for multiple tax-deferred workplace plans, the RMD rules depend on exactly which retirement vehicle you have.
A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain Internal Revenue Code Section 501(c)(3) tax-exempt organizations, and certain ministers. The 403(b) RMD rules are the same as for multiple IRAs. You figure the amount for each, but can take the RMD total if you choose from just one 403(b).
However, 401(k) RMDs are different. If have several private sector workplace retirement accounts, known as defined contribution plans since you (and hopefully your employer) put money into them, each RMD is separate. You, or your former employer if you left the plans at your old workplaces, must calculate each plan's discrete RMD and distribute that amount.
Your prior employers should have an RMD system in place, but double check with the companies and/or the plan administrators, just in case. You know what they say about out of sight, out of mind, and you definitely don't want this potentially costly tax action to be overlooked.
Also, if you do have multiple types of tax-deferred accounts, do not comingle them when computing and making RMDs. Taking an RMD for one type of retirement account from a different type of account is a definite tax no-no.
What to do with your RMD: You do have to take your RMD, but you don't have to spend it.
Once you get your RMD money, it's yours to do with as you please. That includes —
- Putting it into an emergency savings account, or something that pays a higher interest rate, such as a money market account or certificate of deposit.
- Reinvesting it in taxable assets, such as individual stocks or mutual funds.
- Helping with a grandchild's future college costs by contributing to the youngster's 529 college savings plan.
- Passing along sound savings lessons by funding a Roth IRA for a young worker who earned income this year.
Or, if you're taking a lump sum RMD this month and you went a bit overboard with the Christmas gifts, you could use the money to pay off the credit cards you used for holiday (and prior) purchases.
One thing you cannot do with your RMD money is put it into another tax-deferred account. So don't even thing about depositing it back into the account from whence it was distributed or another RMD-affected plan.
Donating instead of receiving: You also can meet your RMD by donating the amount (up to $100,000) to your favorite IRS-approved charity. Just make sure you do so by giving the gift as a Qualified Charitable Distribution, or QCD.
A QCD is accomplished by directly transferring money from a traditional IRA to the qualifying charity.
Even better, a QCD counts as your RMD, but since the distribution goes straight to the charity, the money won't be included in your taxable income. You can read more about this option in my post, The tax-saving ABCs of RMDs and QCDs.
Time your RMDs: December is one of the most hectic times of the year, so consider taking some of the crazy off your plate, at least when it comes to RMDs.
You don't have to wait until the last possible moment to take required distribution(s) from your tax-deferred account(s). As a New Year's finance and tax resolution, look into spreading your RMD throughout the year.
"Many IRA holders who spend their RMDs prefer to take monthly distributions," says Judith Ward, a CFP and a thought leadership director with T. Rowe Price.
The distribution method, one lump sum or a variety of payments, doesn't matter to the IRS as long as you meet the RMD dollar requirement.
You also might find these items of interest:
- Not collecting your employer's maximum 401(k) match
- Women face more, and unique, secure retirement challenges
- Retirement savings' values have dropped, but some trends are positive
- Tax-favored retirement savings get big boost from 2023 inflation adjustments
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