Traditional IRAs and 401(k) plans are among the most popular retirement saving vehicles, largely because of their favorable tax treatment. Traditional IRAs and 401(k) plans provide tax benefits in several ways. First, your contributions may reduce your taxable income. Traditional IRA contributions may be tax-deductible, and 401(k) contributions are taken from pretax earnings. As long as the funds stay inside the account, you don’t pay taxes on your growth.
However, you can’t defer your taxes forever. Distributions from these accounts are usually taxable. The IRS requires you to take distributions from a traditional IRA or 401(k) by age 70½. The amount of these required minimum distributions (RMDs) is based on your account balance and your age. The withdrawal usually increases as you get older.
It’s important to have an RMD strategy in place as you approach age 70 ½. If you don’t take the correct RMD amount, you may pay fees, penalties, and excessive taxes. Also, RMDs aren’t treated exactly the same for IRAs and 401(k) plans. Below are a few questions to ask yourself as you develop your strategy:
What if you have multiple accounts?
You may have multiple IRAs and 401(k)s. It’s not unusual for people to have several 401(k) plans from former employers or to open different IRA accounts at various points in their lives. Your RMD calculation for multiple accounts differs based on whether the accounts are IRAs or 401(k)s.
If you have multiple IRAs, you can simply total your balance for all the accounts and then take the required amount from any account. As long as you withdraw the minimum, it doesn’t matter which account the funds come from. With multiple 401(k) plans, you must calculate and take a separate RMD from each account.
Do you still have to take RMDs if you work past age 70 ½?
Perhaps you enjoy your work and have no plans to retire. Maybe you want to work past age 70 1/2. What does that mean for your RMD calculation? It doesn’t impact your traditional IRA RMDs at all. You must take RMDs from your traditional IRA at age 70½ regardless of whether you are still working.
If you work past age 70½, however, you don’t have to take RMDs from that employer’s plan at that age. Your RMDs would start after you leave the employer. Keep in mind, though, that you would have to take RMDs at 70½ from any balances in former employer plans.
How do RMDs work for Roth IRAs and Roth 401(k) plans?
Roth IRAs and even Roth 401(k) plans have grown in popularity in recent years. Roth plans are popular because they offer tax-free retirement income after age 59½. Roth IRAs also don’t have RMDs, so you’re not required to take distributions.
However, a key difference between Roth IRAs and Roth 401(k) plans is that you must take RMDs from a Roth 401(k). These distributions aren’t taxable, but they are required. If you fail to take them, you could face a penalty. If you don’t wish to take distributions from your Roth 401(k), you could consider rolling the balance into a Roth IRA.
Can I donate my RMDs to charity?
Want to give to charity and minimize your tax burden? Consider donating your traditional IRA RMDs to your favorite cause. The IRS allows you to transfer your RMDs from a traditional IRA directly to a charitable organization. If you do so, the distribution is tax-free. This option isn’t available for 401(k) balances. However, you could roll your 401(k) funds into an IRA and then complete the tax-free transfers.
Ready to plan your RMD strategy? Let’s talk about it. Contact us today at MasterPlan Retirement Consultants. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
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Investment advisory services offered through MasterPlan Retirement Consultants, Inc. a Registered Investment Advisor in the state of Georgia. Insurance products & services offered through Fricks and Associates, Inc. MasterPlan Retirement Consultants, Inc. & Fricks and Associates, Inc are affiliated companies.
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