Required Minimum Distribution Considerations

Monday, May 6, 2019 |

The regulations, considerations, and strategies are ever changing for Required Minimum Distributions (RMD’s) from retirement plan accounts. We wanted to offer some insight into a few strategies that can align your mandatory RMD’s with goals you may have in retirement.

A Definition of Required Minimum Distributions:

“A required minimum distribution is the amount that owners of a traditional, SEP or SIMPLE IRA account and qualified plans must begin withdrawing from their retirement accounts by April 1 following the year in which they reach age 70 1/2. The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation.” Investopedia

The “RMD calculation” is determined by a formula involving the fair market value of the retirement account(s) and the individual’s life expectancy. You must consider the total of all retirement plans in this calculation.

Charitable RMD Uses

  • A Qualified Charitable Distribution (QCD) is a direct transfer of funds from an IRA to a qualified charity. Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000, and will also be excluded from your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later on. In this scenario, the funds would be counted as taxable income even if you later offset that income with the charitable contribution deduction. 
  • Some or all of a retiree’s RMD can be used for charitable purposes. See examples below:

Miscellaneous RMD Facts

  • Roth IRA’s do not require RMD’s until after the owner dies.
  • If you fail to take your RMD by the deadline there is 50% penalty on the amount of the shortfall.
  • If you are still working past 70 ½, and still participating in the retirement plan, you may not have to take RMD’s. (Need to confirm with the plan administrator. All plans are different.)
    • If you own 5% or more of the company, you have to take an RMD from your qualified plan.
  • Inherited IRA’s (a.k.a. Stretch IRA’s) have their own RMD rules:
    • The beneficiary of an IRA can either withdraw the entire account balance within five years of the owner’s death, or they can begin taking RMD’s based on their own life expectancy.
      • For example, a retiree's two grandchildren are the primary 50/50 beneficiaries of an IRA. The 79 year-old retiree was taking RMD’s of $50,000/year on a $1,000,000 IRA. The retiree then passes away and leaves the IRA to the two grandchildren aged 28 and 30.
      • The 28 year-old would have to take an RMD of approximately $18,000.
      • The 30 year-old would have to take an RMD of approximately $18,750.
    • Listing your children/grandchildren as the beneficiaries to an IRA can be a great way to set up a “pension like” asset that can be slowly drawn down during their lifetime.
      • Just like the RMD’s mentioned above, the beneficiaries receiving RMD’s will include the distributions as income and pay taxes on those proceeds.

Note: This is an oversimplified example and much more analysis is required to determine appropriateness and tax effects. The above is a hypothetical example illustrated by A Beneficiary IRA RMD Calculator.

None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.  Tax services are not offered through, or supervised by, The Lincoln Investment Companies.   Calculators are provided only as general self-help planning tools. Results depend on many factors, including the assumptions you provide and may vary with each use and over time. We do not guarantee their accuracy, or applicability to your circumstances.  When you link to any of these websites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these sites. Nor are we liable for any direct or indirect technical or system issues or consequences arising out of your access to or use of these third-party sites. When you access one of these sites, you are leaving our website and assume total responsibility for your use of the sites you are visiting.