The minimum distribution required should be considered in planning> Spokane Journal of Business

When the Individual Retirement Account was first established in 1974, it was designed to be funded only with pre-tax dollars, giving you the benefit of lowering your taxable income and letting your capital grow with a tax deferred, but with it. the minimum distribution required.

The purpose of the RMD is to ensure that IRAs cannot increase deferred tax indefinitely and that the government can guarantee its share of the tax revenue that it has allowed you to carry forward over your lifetime.

Fun fact: the 401 (k) started in 1978 and the Roth IRA was created in 1997, the latter allowing people to pay their taxes on the day they make their contributions to the IRA, thus allowing those contributions and earnings to be withdrawn tax-free. . As a result, Roth IRAs are not subject to the required distributions, since the government has already received its taxes.

In 2020, the Setting Every Community Up for Retirement Enhancement law was passed, raising the age of RMD from 70.5 to 72. The old rule was that you had to take your RMD by April 1 of the following year in which you were 70.5 years old. It is now April 1 of the year after you turn 72.

After the first year, the RMD must be withdrawn from your IRA before the end of the year or you may be hit with a 50% penalty assessed on the amount of RMD you should have taken. Ouch!

I want to dig into some of the key “ins and outs” to know around RMD.

Pre-tax IRAs, Simplified Employee Retirement IRAs, Employee Savings Incentive Plan IRAs, and many pre-tax defined contribution plans, such as 401 (k), 403 (b) and 457 (b) are submitted to RMD. Almost all qualified accounts are subject to RMD rules. The government has allowed the growth of tax-deferred accounts to help with retirement, but wants to make sure it collects tax revenue at some point, even if the money is inherited.

The RMD is calculated based on the account value as of December 31, then divided by a table of determined life expectancy factors. We should also note that the RMD is calculated from all of the qualified accounts you have, but is taken from any combination of them. So if you have $ 1 million in an IRA and $ 500,000 in a SEP IRA, your ending year value will be $ 1.5 million divided by your table life expectancy to reach the amount. minimum you should take. You can always take more than that if your plan allows it.

In 1997, everything changed with the advent of the Roth. Roth IRAs and any Roth part of a defined contribution plan are not subject to RMDs as long as the person holding the account is alive. If there is a balance in the account following the death of such person, the beneficiary is required to withdraw the money from the account within 10 years. The same timeframe rules apply to the pre-tax IRA, except that any non-spouse beneficiary will pay ordinary income tax instead of getting tax-free distributions like the Roth.

This assumes that the Roth existed for five years before his death.

Some defined contribution plans allow you to avoid withdrawing RMD from their account if they are still employed and do not own 5% or more of the business.

If you are 72 and would traditionally be subject to RMD withdrawals from your 401 (k) but are still working and are in deferral with the 401 (k) employer in question, you may not have -be not to withdraw money. We were able to help people avoid unnecessary taxes by maximizing their 401 (k) contribution through salary deferral – if they don’t already – and using their RMD from other qualified accounts to live on. instead of their income.

In this way, they are not subject to tax on their earned income and their RMD. This method could prevent them from moving to the next marginal tax rate.

An additional strategy is to work with your CPA to determine how much you can convert from your pre-tax accounts to after-tax accounts on an annual basis without moving to the next tax bracket. While this method may not make sense for high income earners, it will help others reduce minimum distributions when the time comes and enjoy tax-exempt growth.

Ben Klundt is a financial advisor at Ten Capital Wealth Advisors LLC, in Spokane. He can be reached at 509.325.2003 and

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