If you or someone you know is celebrating one of the key birthdays on the image below you may want to look into whether there are any financial decisions you have to or can make around the milestone.
Let’s dissect one of the key birthday’s above and take a look at what types of strategies you may want to use. When you turn 70 1/2 you have to start thinking about Required Minimum Distributions (RMDs) from your retirement accounts. Over the years when you added money to your retirement accounts you received a tax deduction in the year that you made the contribution. You also have been able to defer paying any tax on the gains or income that your retirement account has generated over the years. Well now the IRS is coming calling to collect their tax from the account. Once you hit 70 1/2 you will have to take a certain amount out of your retirement accounts each year and pay tax on the money that comes out. The amount that comes out is based on your retirement account(s) balance and your age.
Here are a couple of things to consider about RMD’s:
Does it make sense to make use your RMD to make a Charitable Gift? One of the biggest changes in the new tax laws are a large increase in the standard-dedication amount and a $10k limit on deductions for state and local taxes. However the new law did not change the rules for qualified charitable distributions. This provision allows many taxpayers age 70 1/2 or older to transfer as much as $100k a year to qualified charities from their individual retirement account as long as the money is transferred directly to charities. The transfer counts toward taxpayer’s RMD’s for the year. Although the transfer is not tax-deductible it can be highly beneficial because the amount is not include in your Adjusted Gross Income (AGI) when it comes time to file taxes. Your AGI level can affect other major items such as the net investment income tax and how much of your Social Security benefits may be taxable.
When should you take your first RMD? The deadline for taking an RMD is December 31st of each year. However there is an exception for the year you turn 70 1/2. For the age 70 1/2 year, the RMD for that year can be delayed until April 1st of the next year.
What should you do with the RMD? Spend it, save it, gift it.
Does it make sense to convert any of your Traditional IRAs into Roth’s? There are no RMD’s required on Roth IRA’s so it may make sense to convert some of your Traditional retirement accounts into Roth’s.
You may not actually have to take an RMD if you are still employed and have a 401k or 403B.
While RMD’s may seem simple there is a lot that goes into the decision of what to do around them.
If you would like any help analyzing your specific situation feel free to set up an appointment with me at https://calendly.com/bautisfinancial/meeting/ and I’d be happy to talk.
