If you’ve been saving for years in a traditional IRA or a 401(k), you’ve benefited from the tax-deferred growth of your investments. But you’ll finally have to pay Uncle Sam when you take the money out. You must start taking withdrawals after you turn age 70 ½, even if you don’t need the money. The following strategies can help you minimize taxes, avoid penalties, and make smart decisions when you have to start taking IRA withdrawals.
- You can delay taking your first required minimum distribution, but it may end up costing you more.
You have to take required minimum distributions from your traditional IRAs and your 401(k)s after you turn age 70 ½, based on the account balance at the end of the previous year and the IRS’s life-expectancy factor for your age. You generally have to take RMDs by December 31 each year, but you have extra time to take the first withdrawal – until April 1 of the year after you turn 70 ½. However, delaying your first withdrawal could end up costing you more in the long run. You’ll have take your second RMD by December 31 of that year, too, and having two RMDs in one year could bump you into a higher tax bracket. The extra income could also cause you to pay higher Medicare premiums (if your modified adjusted gross income, plus tax-exempt interest income, is higher than $85,000 if single or $170,000 if married filing jointly – see Medicare Premiums: Rules for Higher-Income Beneficiaries for details) and could cause a larger portion of your Social Security benefits to be taxable (see Income Taxes and Your Social Security Benefit for details). Pay attention to these income thresholds when deciding whether or not to delay your first required withdrawal.
- You have a lot more flexibility when taking required withdrawals from IRAs than you have for 401(k)s.
If you have several 401(k)s, you have to calculate the required withdrawal and take the money from each account separately. Your 401(k) administrator may let you sign up to withdraw money automatically every month or by a certain date every year, so you won’t need to worry about missing the RMD deadline.
The IRA rules are different. If you have several traditional IRAs, you calculate the required withdrawals from each account, but then you can add up the total RMDs from all of the accounts and can take the money from any one or more of your traditional IRAs (Roth IRAs do not have required distributions). You can choose, for example, to keep money growing in an IRA with low fees and better investing choices and tap a less-attractive IRA for your withdrawals first.
You can’t take 401(k) withdrawals from an IRA, and you and your spouse both need to calculate and withdraw your RMDs separately, even if you file a joint income-tax return.
- You can avoid the tax bill by giving your RMD to charity.
A great strategy for avoiding the tax bill on your RMDs is by making a “qualified charitable distribution” (QCD). After you turn age 70 ½, you can give up to $100,000 each year directly from your IRA to a charity, which counts as your RMD but isn’t included in your adjusted gross income. This move can be particularly helpful if you don’t itemize your income-tax deductions and wouldn’t get a tax break for your charitable gifts otherwise. Keeping your RMD out of your adjusted gross income can also help you avoid or minimize the Medicare high-income surcharge, if you were near the cut-off.
You need to make the transfer directly from your IRA to one or more charities; you can’t withdraw the money first. Ask your IRA administrator for its procedure.
- You can delay some – but not all — RMDs if you’re still working at age 70 ½.
If you’re still working at age 70 ½, you can delay taking RMDs from your current employer’s 401(k) until after you leave your job (unless you own more than 5% of the company). But you still need to take required withdrawals from your traditional IRAs and from former employers’ 401(k)s. You may be able to avoid some of these RMDs, however, if your current employer lets you roll money over from previous employers’ 401(k)s into your current plan.
- Roth IRAs don’t have RMDs, but Roth 401(k)s do.
You don’t have to take RMDs from Roth IRAs, but you do have to take required distributions each year from Roth 401(k)s, even though the IRA withdrawals are not taxable. However, you may be able to avoid the RMDs if you can roll over the Roth 401(k) money into a Roth IRA. If you wait until age 70 ½ to do the rollover, you’ll need to take that year’s RMD first before you can roll over the remaining money.