Kevin Slater, CEO, SoundView Advisors

If you inherited a retirement account or are at least 72 years old, you are likely subject to Required Minimum Distributions (RMDs) from your retirement account. RMDs are the Internal Revenue Service’s way of saying: “Thank you for saving all those years. We sure hope you enjoyed that tax-free growth. Now it’s time we get our cut.”

Basics The amount of the RMD is calculated each January based on the December 31st retirement account balances and a formula tied to your age. The funds do not need to be spent or withdrawn from the investor’s portfolio; they simply need to leave the IRA. The withdrawal is generally (but not always) subject to income tax at ordinary income tax rates. Any portion of the RMD not drawn is subject to a 50% penalty (they REALLY want their cut!). 

Timing We are encouraging clients to make their RMD within the first 90 days of the year if reasonably possible. Formerly, we distributed RMDs throughout the year or during the last quarter of the year. However, we have had situations arise in which not having the RMD done earlier proved detrimental to the client and/or their heirs due to tax law provisions.

Paycheck Substitute Some clients like to replicate a paycheck by receiving their RMD periodically over the course of the year. We can accomplish this by transferring the RMD to a taxable investment account first, then sending the “paychecks” from there.

Tax Withholding It is possible to withhold funds from your RMD for federal and/or state income taxes. Alternatively, you may choose to take the RMD without withholding and make a lump sum payment toward estimated taxes once those are calculated. Either one will keep the IRS happy.

Charitable Bonus Those 70 ½ years of age or older can make gifts directly from their individual retirement account (IRA) to a qualified charity. Qualified Charitable Distributions (QCDs) are not treated as income yet still counts toward satisfying the RMD. 

Making QCDs reduces the investor’s taxable income and thereby the taxes they owe. Since QCDs are not income in the first place, they cannot be deducted again. That said, making QCDs rather than cash gifts (and deducting them) usually leads to net lower taxes.

To best utilize the QCD strategy, any planned charitable gifts should be identified early in the year. Our team will ensure these gifts are made and the RMDs completed soon thereafter. While it may feel a bit odd to be making charitable decisions in January rather than December; we assure you the charities will be happy to receive the funds at any time!

At the end of the day, we make sure clients meet their RMDs in the manner most appropriate to them. Nobody wants the IRS knocking on their door!