As soon as the clock strikes midnight on New Year’s Eve and a new calendar year officially begins, our inboxes are flooded with emails from clients requesting the calculation and processing of their required minimum distribution (RMD). Ok, perhaps that is a bit of an exaggeration, but the beginning of every year does contain a few weeks of RMD-related conversations. Before you take your 2019 required minimum distribution, we encourage you to think through the following:
Do you make charitable contributions each year that could be done using retirement funds vs. after-tax money in your checking account? Qualified charitable distributions (QCDs) count towards fulfilling your required minimum distribution. They can also help reduce your adjusted gross income and get money to your favorite charities like normal. If you expect to switch from itemizing deductions to taking the standard deduction in 2019 and beyond, you won’t see a tax benefit from traditional charitable contributions, which makes a QCD even more attractive.
With most custodians, you have the flexibility to choose the level of federal and state tax withholding assessed on your distribution. These amounts can also be changed every year. Withholding is an ideal tool to help minimize interest and penalties so if you consistently have tax due, increase your withholding percentages. If you find yourself with a refund each year, consider decreasing your withholding to get more cash in your pockets now.
In some years, you may realize that the RMD is more than necessary to cover your yearly expenses. This may hold especially true when combined with your other income sources. Unfortunately, there’s no way to avoid or postpone the distribution. However, you can use the excess to build up your cash reserves or turn around and re-invest the amount you don’t need.
Consider reviewing who the primary and contingent beneficiaries are for each of your retirement accounts. You may feel 100% comfortable with the current beneficiaries or decide to make some changes. Beneficiary designations supersede intentions expressed in a will or trust so it’s important that everything is aligned.
Don’t forget about inherited retirement accounts! Beneficiaries that are younger than 70 1/2 may still have required minimum distributions in these situations. The penalties for missing an RMD are egregious so it’s definitely something you don’t want to miss.
Take it now! After your first year, you have until December 31 of each year to take your RMD. But why wait? Avoid the stress and rush of doing it late in the year. In fact, make it one of your New Year’s resolutions and cross it off your list now.
Laura Bereiter, CPA, PFS™, CFP® joined White Oaks Wealth Advisors in October 2015. She offers comprehensive wealth, tax, and estate planning to the firm’s clients.