Our last article discussed year-end tax retirement tax planning for individuals participating in their employer’s 401(k) plans. This article will focus on individuals over age 59½ with large traditional IRA balances.
Required Minimum Distributions
IRA owners also have some year-end tax planning opportunities. Money in a traditional IRA compounds, tax deferred, but required minimum distributions (RMDs) take effect after age 70½.
Example: Bert Palmer, age 75, has $1 million in his IRA. The IRS Uniform Lifetime Table puts his “distribution period” at 22.9 years. So Bert divides $1 million by 22.9 to get his RMD for this year: $43,668. If Bert withdraws less, he will owe a 50% penalty on the shortfall. (If you are 70½ or older, you should withdraw at least the RMD amount.)
Although Bert does not need the money for living expenses, he must take the distribution to avoid the penalty. The $43,668 is added to Bert’s other income, so the effective tax on that distribution can be steep.
Related Article: You may need to add RMDs to your year-end to-do list
Increasing Distributions after age 59½
Suppose that Bert dies with that $1 million IRA, which passes to his daughter, Carol. Carol must take RMDs each year, regardless of her age. If Carol is now a middle-aged, successful executive with a high income, those RMDs likely will be heavily taxed. Indeed, pretax money in a traditional IRA probably will be taxed when paid out, whether to the IRA owner or to a beneficiary.
Therefore, IRA owners may want to take distributions before age 70½. Careful planning can fine tune the amount withdrawn at year-end 2017, keeping taxable income within a relatively low tax bracket. Withdrawn funds may be spent, given to loved ones, reinvested elsewhere, or moved to a Roth IRA for potential tax-free treatment in the future.
Our office can go over your specific situation to assess whether it makes sense to reduce your traditional IRA before age 70½ to decrease the future RMDs for you and for your beneficiaries.
