If you have an IRA, you are required to make a distribution annually once you reach a certain age (if you were 70½ prior to January 1, 2020, then you should already be making required minimum distributions known as “RMDs” – otherwise you could be subject to a 50% excise tax). It is common to delay making distributions until required since there is income tax on the distribution (unless it is a Roth IRA). The following are 10 common questions on RMDs.
- Do I have to make a RMD the year I turn 72 (assuming you are not already taking out RMDs)?
Answer: You are not required to make an initial distribution until April 1 of the year following the year that you turn 72. However, if you delay making a distribution until the first quarter of the year after you turn 72, you will still need to make a distribution for that year as well. It is anticipated that the law will change later this year whereby if you are not 72 by December 31, then you will not be required to make a distribution until the year you turn 73 (or by April 1 the year after).
- At what age can I make a distribution without an excise tax?
Answer: The year you reach age 59½ or thereafter, you only have to pay income tax on the distribution. If you take out a distribution before, then an excise tax of 10% will be assessed (there was an exception during the pandemic). There is also an exception if you follow the strict rules of IRC 72(4).
- Is it acceptable to make a distribution towards my RMD earlier in the year before I turn 72?
Answer: Yes. You may take a RMD on January 1 the year you turn 72. You won’t have to pay income tax on that RMD until the next year.
- If I am still working when I am 72, do I still need to make a RMD from an IRA or a 401k?
Answer: If you have a traditional IRA and you are still working the year you turn 72, then you must make your RMD. However, if you have a 401k through employment, some 401k plans permit distribution delays until April 1 of the year following the year of retirement to take your first RMD (unless you own more than 5% of the company).
- Can I still make contributions to my IRA if I am 72 and still working?
Answer: Yes – but only if you are working. However, you must still make withdrawals by April 1 after the year you become 72.
- What is the date of valuation to calculate the RMD?
Answer: December 31 of the year before you turn 72 (even if you don’t take out your RMD until April 1 following the year you turn 72). So, if you think the market may go down and your IRA consists of stocks, etc., then you would take your RMD earlier in the year you turn 72. Conversely, if you think the market will go up, you might delay the RMD. You can reduce risk by simply taking distributions either monthly or quarterly.
- Do I get charitable deduction if I distribute from my IRA directly to a charity?
Answer: No, but you won’t have to pay income tax on the distribution provided it is made directly to the charity and it is $100,000 or less in that calendar year. This is called a QCD.
- If part of my initial RMD is a QCD, does that change when the balance of my RMD must be made?
Answer: No. It still must be made by April 1 of the year that follows the year you turn 72.
- If my RMD is a QCD, could this disqualify me from long-term care Medicaid as a transfer penalty?
Answer: Possibly. Long-term care Medicaid (i.e., nursing home care, care at home) is “means-tested,” and (as a result) it has a five year look-back period. So, if you are already ill and the IRA counted as a resource (see below) and you then made a transfer to a charity, then it could be subject to a disqualifying transfer penalty. However, if you had a pattern of taking from your IRA and tithing or other charitable giving prior to illness, it would not likely be penalized.
- How are RMDs treated for Medicaid eligibility purposes?
Answer: Although this rule could easily change, in Texas RMDs are considered as income in the month of receipt. There has been speculation that this may change to average the RMD to a monthly amount. Presently, traditional IRAs (unlike 401ks, Roth IRAs, etc.) do not count as a resource for long-term care Medicaid (if the applicant is making RMDs) – it is just the income that is an issue in connection with eligibility. The rules differ from state to state.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.