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Required Minimum Distribution Tips

Tip 1:

My father said that he quit having birthdays a long time ago, but hopefully he didn’t stop paying attention to birthdays when he reached the mystical age of 70 ½. That is the year he needed to take his first required minimum distribution (RMD) from his IRA account(s).  Birthdays do matter when making this decision, and you should consider the timing of your first RMD for the best tax results.

The way it works is this: Dad could have taken his first RMD in the calendar year that he turned 70 ½ or he could have waited and taken his first distribution by April 1st of the following year.  Waiting would have meant that he would have been taxed on two required minimum IRA distributions in the same year.  Hopefully dad consulted with his tax planner in advance to decide what his best choice would have been.

This is a unique, one time tax planning opportunity.  Some taxpayers will find that taking two RMDs in one year will provide them a tax savings while others find that doubling up means that they paid more tax because they reached a higher tax bracket.

Tip 2:

Remember to take your RMD out of your lowest performing IRA.  While you calculate your RMD based on all of your IRA account balances, you can distribute the amount from any one or any combination of accounts. Look at each account’s investment performance and draw from the account that is least profitable to maximize future growth.

Tip 3:

You may be eligible to change your RMD calculation method.   You are allowed a one-time switch from either the amortization or annuitization method to the RMD method which uses a longer life expectancy than either the amortization or annuitization tables.  Switching can lower your RMD payment and your annual tax bill and pass more of your retirement funds to your estate.

As always, remember to discuss your personal situation with your tax advisor or financial planer when beginning or changing your RMDs to produce the best results.