Now that we're in the final quarter of the year, older taxpayers need to keep a careful eye on their required minimum distributions (RMDs) for the year, as a stiff penalty applies to those who don't withdraw enough from their retirement accounts.
Take the RMD or pay a big penalty.
Taxpayers must start taking annual RMDs from their traditional IRAs by April 1 following the year in which they attain age 70 1/2. As for qualified plans like a 401(k), 5% owners are subject to the same rules as apply for IRA owners. However, for a non-5% owner, RMDs must commence by April 1 of the year following the later of the year in which the taxpayer
(a) reaches age 70 1/2, or
Failure to withdraw the annual RMD could expose the taxpayer to a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount that actually was withdrawn.
The amount of each RMD is calculated separately for each IRA. However, the RMD amounts for the separate IRAs may be totaled and the aggregated RMD amount may be paid out from any one or more of the IRA accounts.
The rule permitting amounts in traditional IRAs to be aggregated for RMD purposes applies only to IRAs that an individual holds as an owner. It doesn't apply to IRAs that an individual holds as a beneficiary. IRAs held by a person as a beneficiary of the same decedent may be aggregated, but can't be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent. And no traditional IRA can be aggregated with a qualified retirement plan account or a Roth IRA to determine payouts.Additionally, RMDs must be calculated separately for each qualified plan account and paid separately.
RMD strategy for dealing with possible revival of qualified charitable contributions.
For pre-2015 distributions, an annual exclusion from gross income (not to exceed $100,000) was available for otherwise taxable IRA distributions that were qualified charitable distributions. Such distributions weren't subject to the general percentage limitations that apply for making charitable contributions since they weren't included in gross income and couldn't be claimed as a deduction on the taxpayer's return. Since a qualified charitable distribution wasn't includible in gross income, it didn't increase AGI for purposes of the phaseout of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified levels.
To constitute a qualified charitable distribution, the distribution had to be made
(1) after the IRA owner attained age 70 1/2 and
(2) directly by the IRA trustee to a Code Sec. 170(b)(1)(A) charitable organization
This provision was retroactively extended for one year so that it was available for charitable IRA transfers made in tax years beginning before Jan. 1, 2015. Taxpayers who would benefit this year from taking charitable contribution deductions (if they were available) instead of RMDs, should consider deferring their RMD for 2015 until near the end of the year. If the charitable contribution deduction is revived for 2015 before the end of this year, the taxpayer can have the charitable contribution counted towards his RMD. And, if that deduction isn't revived before the end of the year, he can make a full RMD contribution before the end of the year.