For many, the holiday season means survival mode. You have ugly sweater parties to attend, a gift list to execute, turkeys to baste, and a whole slew of other tasks between now and New Year’s Eve.
Don’t let the clock strike midnight on your required minimum distributions (RMDs).
Non-working retirees must start taking RMDs from their tax-deferred retirement accounts once they turn 70½. RMDs also apply to non-spouses of any age who inherit a 401(k), IRA, qualified annuity, and similar tax-deferred accounts.
Failure to comply with the IRS rules could mean a 50% tax penalty that would certainly put a damper on your New Year’s celebration.
A helping hand
Transamerica’s Advanced Markets Group created a helpful guide to navigating RMDs. It covers owner RMDs, beneficiary RMDs, and variable annuities.
Let’s take a quick look at each category.
If you’re 70½ or older and could use some extra holiday cash, the RMD might be just what you need. Account holders are required to take their RMD by December 31 of each year, with one exception. The initial RMD can be delayed until April 1 following the year the account holder turns 70½.
For example, someone who turns 70½ on December 15, 2017 (or any other day in 2017) can either take an RMD by December 31, 2017, or anytime between January 1 and April 1, 2018. Regardless of the timing, that person will have to take a separate RMD by December 31 in all subsequent years – including another one in 2018.
The amount of the RMD is determined by an IRS table based on the value of the account on December 31 of the prior year, your age, and life expectancy. There’s a separate joint-life table for account owners who have a spousal beneficiary who is at least 10 years younger.
Non-spouses who inherit tax-deferred retirement assets or annuities have some additional options.
- Lump-sum payment. For large account balances, this might not be the most tax-efficient option because the money is treated as ordinary income.
- Five-and-out. The beneficiary can spread the payments out over five years, potentially softening the tax hit.
- Stretch distributions. The account balance can be stretched over the life expectancy of the beneficiary, resulting in smaller RMDs over time. The IRS has a table for that one, too. The first distribution must be taken by December 31 following the year of the IRA owner’s death.
Designed to drive tax-deferred retirement accounts to zero during a person’s lifetime, the IRS increases the percentage that must be withdrawn from those accounts to satisfy RMDs each year. This might not align with a person’s retirement income strategy.
Variable annuities can offer RMD-friendly living benefits while still guaranteeing lifetime income. That means the owner may be able to exceed his or her annual withdrawal limit to satisfy the RMD – without reducing the base allowable income from the living benefit.
For example, the RMD at 80 years old is 5.35%. An 80-year-old with an annuity inside an IRA may be able to exceed his or her annual withdrawal limit without affecting the guaranteed amount of future distributions.
RMD rules can be complicated (not to mention more stressful than planning the family holiday dinner), so we encourage you to talk with a financial professional if you have questions.
We also have a more extensive RMD cheat sheet on our Knowledge Place.
There are unconfirmed rumors that it goes great with egg nog.
Things to Consider
- Understand your options for taking an RMD from an inherited retirement account.
- If you reached age 70½ in 2017, you have until April 1, 2018 to take your initial RMD.
- Talk to a financial professional if you have any questions about RMDs.
Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.