Required Minimum Distributions
“In this world nothing can be said to be certain, except death and taxes.”
Founding Father and star of the $100 bill, Benjamin Franklin is the author of that quote. Given our national debt and high level of taxes, he must be spinning in his grave.
One method the Federal Government uses to induce taxation, even when the taxpayer would rather wait, is through forced Required Minimum Distributions (“RMD’s”) from your IRA or other retirement plans. These annual taxable retirement payments appear complicated; but here’s a high level understanding of how RMDs work and a way to make this tax burden benefit The National Corvette Museum. Let’s digress to some retirement basics.
Hopefully, you’ve set aside money to fund your 401(k) plan or IRA on a pre-tax basis and received a tax deduction. In each case the funds grow “tax deferred”: no tax on the growth. However, once you start withdrawing from these retirement assets, the income is taxable.
It’s important to be aware of these ages:
- 59½: From this age forward you can take retirement funds and “only” have to pay ordinary income taxes. Before then, the Government adds a 10% “excise” (penalty) tax;
- Between 59½ and 70½ (Really ages 65, 66 and 67): “Normal” Social Security retirement ages are determined by your birth year. Pre-1938 is 65, 1938-1954 is 66 and 1955 on is 67; and
- 70½: When you MUST begin your annual RMD’s. You can delay your first annual payment to April 1st following your 70 1/2 birthday. Example: if you were born March 15, 1946, your 70 1/2 birthday is September 15, 2016. Your first annual RMD could be immediate; or, any time before April 1, 2017. By waiting until April 1, 2017, you’d be stuck taking your first annual RMD in 2017, AND your second annual RMD by December 31, 2017. It’s important to note that if you don’t take your annual RMD, there is a 50% penalty!
You should log onto www.ssa.gov for an updated Social Security statement to discuss with your tax professional.
If you’re in category #3 above, and charity-minded, what’s a creative and legal way to NOT have to pay taxes on the RMD while doing some good? Donate it to The National Corvette Museum!
In 2006/2007, Congress passed legislation and the President signed into law that anyone over 70 1/2 could take funds from their Individual Retirement Accounts (IRA’s), including their RMD’s, and donate them directly to an eligible charity.
The law kept expiring, but was extended on a year-to-year basis by Congress and The President. On December 18, 2015, the “Protecting Americans From Tax Hikes Act” (“PATH”) was passed into law (House Bill #S.185 PATH Act, Section 112) extending these Qualified Charitable Deductions (QCD’s) permanently. The maximum contribution per tax year for any taxpayer over 70 1/2 is $100,000.
Though not considered a charitable deduction, the big advantages of using eligible IRA assets as a payment to a charity are:
- It’s tax-free;
- Will NOT be considered part of your overall taxable income; and
- Counts as part of your annual RMD.
First check with your tax advisor, but if you have an affinity toward helping the NCM and can afford to forego your RMD, taking advantage of the PATH incentive is not only a terrific benefit, but it may just help Ben Franklin from spinning.
Thomas F. Ferrara, MBA
CEO, Future Value Associates
Sarah Mullane Becker
President, Future Value Associates
Thomas F. Ferrara and Sarah Mullane Becker are Registered Representatives and Financial Advisors of Park Avenue Securities LLC (PAS). OSJ: 800 Westchester Avenue, 4th Floor, N409 Rye Brook, New York, 10573, (914) 288-8800. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representatives of The Guardian Life Insurance Company of America ® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Future Value Associates is not an affiliate or subsidiary of PAS or Guardian.
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.