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End of the Year and Your RMD

Can you believe we are in the last quarter of the year? Christmas will be here before we know it and soon to follow is the first of the year when we have to start thinking about tax filing again.  

 

But before we get there we need to think about the RMDs (Required Minimum Distributions). When you reach 70 1/2, the IRS requires you to take a certain percentage out of your IRAs, 401ks, SEPs and other qualified retirement accounts each year and pay the tax due. If you own traditional (not Roth) accounts, failing to take the RMD is very costly - IRS imposes a 50% penalty for failing to take the RMD.

 

Each year the RMD percentage increases making the amount you take each year increase, and therefore the amount of your taxable income to increase as well. So by the time you are 85, the percentage has grown and your tax liability has increased proportionally.

 

There are ways to reduce the tax on your RMDs. One of the biggest is to have the amount of your RMD sent directly to an IRS-approved charity (church, synagogue, college, university, Red Cross, Salvation Army, etc). If you give regularly to charities, this can save you lots of money on your taxes. Let's say your RMD is $10k a year and you normally give $8k to charities. If you have the RMD send directly to the charities then you only have to claim $2k on your tax return as income. In the 20% tax bracket, this could save you $1600 on taxes because the income never hits your tax return.

 

Another way to avoid taxes on RMD is to convert a portion of your traditional money each year to a Roth. Let's say you sold a property for a $100k loss (which is not uncommon if you purchased a property before the bubble burst). With that negative income, you can convert $100k of traditional IRA to a Roth and never pay a dime in taxes for the conversion. Or let's say you had a large lost in the stock market for the year. Another opportunity to convert a portion without having an additional tax burden.

 

But the thing to remember is both of these options must be completed before December 31st. Since the holidays also have people taking vacations (like at the companies which house your assets) it is prudent not to wait until the last minute. I recommend you making the changes no later than December 1st so you can make sure all the paperwork is in place and you do not miss out on any of these tax saving possibilities. So call today for your appointment to see if you qualify for a tax-free conversion.

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Investment advisory services are offered through Safe Harbor Fiduciary, LLC, a Registered Investment Advisor. Insurance products and services are offered through Safe Harbor Tax Advisory, LLC.

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