Required Minimum Distributions (RMD)

rmd-withdrawal-rules-retirement-income-penalty-fine-tax-ira-401k_largeDo you know how much you HAVE to take out of your traditional IRA each year?  If you are 70 years old or older (or if your parents are) then listen up!

The IRS requires you to take a minimum amount of your Individual Retirement Account (IRA) and/or 401k each year.  The logic is that you have saved money for retirement and the IRS has not received tax revenue on that money yet.  So once you turn 70.5 (why is it not 70?…probably some politician was about to turn 70 years old!) the IRS makes you take a required minimum amount out so that they can begin receiving their tax revenue.  They take the required minimum distribution (RMD) very serious by levying a 50% penalty if you forget!  That right…if you had to take $5,000 out and you forgot, you get the privilege of writing the IRS a check for $2,500!

So how do you calculate the RMD?  I regularly hear people say that they are confused by the calculation.  However, it is pretty simple once you understand what you are doing.

You take your IRA balance on last years 12/31 and divide it by the life expectancy/distribution factor in the IRS table (link below).  The result is the minimum you HAVE to remove from the account in that given year.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf 

Let’s look at an example:

You turned 70 years old on 5/1/2018 (born 5/1/1948).  You had $520,000 in your traditional IRA  at the end of last year.  It is now up to $600k because you worked with me and we grew your account.

Since you will celebrate your 70.5 Birthday this year on 11/1/2018 you have to take an RMD!  Since you turned 70 years old this calendar year, you will use 27.4 as your divisor (see link above).  Your numerator is your IRA account balance as 12/31/2017 ($520,000 in this example).

RMD = $520,000/27.4
RMD = $18,979 (notice I rounded up just to be safe).

In 2019 you will have to take the total of 12/31/2018 IRA balance/26.5.
In 2020 you will have to take the total of 12/31/2019 IRA balance/25.6. etc…

Note, there are a few special circumstances where this calculation is not applicable or you have the option to use a more favorable calculation.  A few examples: IRAs that you have inherited from someone else.  RMDs if your spouse is more than 10 years younger than you (and he/she is the only beneficiary).  Roth IRA’s.

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Must Do Year End Tax Moves

Tax PlanningIf you itemize your income tax deductions (meaning you deduct your mortgage interest, property taxes, charitable deductions, etc.) you could be in for a big surprise next year!  Congress just changed the tax law for 2018 and beyond.  Many people that currently deduct the above items will no longer be able to starting next year and should take action before 12/31/2017.

So what should you be doing?

  • Reach out to your county auditor to find out how much you owe for next year
  • Visit your treasurer’s office to pay the bill before 12/31 to claim your deduction this year.
  • Make your charitable donations this year!
    • From a tax standpoint, your charitable donations are not likely to help your tax situation in 2018.  So clean out the house now and make those last minute gifts to Goodwill or your favorite charity.
    • Most people underestimate how much their clothes and furniture could be worth.  Take a look at The Salvation Army’s Valuation Guide here.

Congressional Tax Changes

2017-Stamp-400x267Are you confused by all the discussion in Washington around the tax changes?  Welcome to the club!  I have read numerous articles outlining how taxes may change or what might happen.  HERE is one of the best (and most recent) articles I have found.

As with any tax reform, there will be winners and losers but a simplification of the code is certainly needed.  I always stress to my clients the importance of flexibility in times of uncertainty.  Work with your tax professional, or give me a call, to discuss strategies to put you in the in best available position no matter what changes occur.

 

Man’s Best Friend – Roth Conversions

Okay, so maybe my two rescue dogs are my loyal companions, but in the financial planning world, Roth Conversions are “mans best friend.” If done by December 31, you have until October 15, 2013 to determine if it was a good move for you. If you decide your tax situation would have been better if you wouldn’t have converted (or only converted a portion) you have the option to undo all (or a portion) of your conversion. We call it the “undo button.”

Do it now and work with your tax preparer after New Years (perhaps after the resolution of the current tax mess) to see if it was a good move. If tax rates go up, it could be a big win!

P.S. Yes…that is my dog, Twix, in Minnie Mouse ears!

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401k Limits – Inflation Adjustment

2013 must be the year of raises…

RP-2012-41 will be published on November 5, 2012, and will contain the full details of the announced changes, but some of the changes are outlined below:

This week the Social Security Administration announced that recipients will receive a 1.7% increase…http://www.ssa.gov/cola/

And the IRS announced an increase in both the 401k contribution limits and gifting limits.  Starting in 2013, you can now add $17,500 to your 401k (plus and extra $5,500 if you are over 50).  This is a $500 increase in the contribution limit.  In 2013 you will also be able to gift up to $14,000 per year to another individual without having to file a special tax return.  You can read about these increases here… http://money.cnn.com/2012/10/18/pf/taxes/401k-contribution-limit/index.html?source=linkedin&goback=.gde_55224_member_176611264

Hidden Taxes

Are you sick of the political adds yet?  Just think…only a month and a half to go!  Taxes are one of my favorite topics (lame…I know…) and I had to give strong consideration to facts being thrown around by each candidate about their tax plans.  I don’t want to get into a political debate here, but simply want people to wake up and understand how taxes work.

Tax rates are not the only thing to pay attention too!

So many people get caught up on _____ (insert favorite politician) is going to raise/lower taxes on this class of people.  Wake up!  Taxes come from everywhere!

Do you have a Flexible Spending Account (FSA) at work?  Well in 2013 the most you can add to your FSA will be reduced to $2,500…(see article below)

http://www.shrm.org/hrdisciplines/benefits/articles/pages/fsaguidance.aspx

So if last year you put in $5,000 and got a full tax deduction and this year you can only put in $2,500 isn’t that just a way to make you pay more in taxes without raising your actual tax rate.

Have you ever had to pay Alternative Minimum Tax (AMT)?  Don’t know?  HINT: If there is a number on line 45 of your tax return you are paying it.  Again, another way to institute tax policy without upsetting the masses.

Are you or your parents having to pay taxes on your Social Security income?  Another hidden tax!

The list goes on and on…Come on middle-class!  Don’t be fooled into thinking it is just about the tax brackets…

What hidden taxes are you paying?

2010 Tax News

If you turn on the news tonight, no doubt the top national story will be the year-end tax deal that the Obama Administration and Republican leaders have negotiated.  While it is not yet final, the deal would extend the current tax rates (they were scheduled to go up next year) for another two years and extend unemployment benefits.  Most importantly for many middle American families, the bill would increase the Alternative Minimum Tax (AMT) patch.  This will keep millions of families from having to pay additional taxes.

This finally gives us more direction from an income tax standpoint and could potentially make the next couple of years great for Roth IRA conversions.  If you have questions about if you should convert, please email me.

Finally, the tax bill would give us clear direction on the Federal Estate Tax (a tax that must be paid at ones death to transfer money to their heirs).  It would increase the exemption amount to $5 million that could go to the next generation free of federal estate tax.

for more complete tax details, check out : http://blogs.wsj.com/washwire/2010/12/07/the-big-issue-the-cost-of-a-second-year-of-tax-cuts/

and for estate tax details:  http://www.frumforum.com/the-estate-tax-rises-from-the-dead