Are there ways to avoid or reduce my distribution requirements?
There are strategies you can leverage, but consult your Ameriprise financial advisor on whether it’s right for your unique situation:
1. Consider a Roth conversion: Traditional IRAs and 401(k)s are subject to RMDs, so you may want to convert some assets to a Roth IRA or Roth 401(k) to avoid distribution requirements for future years. Conversions of pretax assets to a Roth are taxable so before doing so, be sure to consider all the relevant issues.
2. Consider a qualified charitable distribution: One potential strategy if you are 70 ½ or older is to make a qualified charitable distribution (QCD) to an eligible 501(c)(3) organization of your choice, up to $100,000 total for one or more organizations.
A QCD is a nontaxable distribution from an IRA directly to an eligible charity. If you are subject to RMDs, it will count toward your RMD for the year — and neither you nor the eligible charity will have to pay income taxes. Keep in mind that a QCD is reported differently on your taxes than a regular charitable contribution. QCDs are not available from 401(k) plans. Consult your tax professional if you are considering QCDs.
3. Consider strategic withdrawals from pre-tax accounts: Though you are not required to take distributions until your RMD beginning date, if you are taking income from your assets, you can consider taking distributions from your pre-tax accounts as soon as you are able to, at age 59 ½ for most people unless a specific exception applies. This strategy would allow you to spread out your taxable income over time, minimizing a large jump in taxable income when you start taking RMDs. This not only can impact your overall tax bracket, but also how much you pay for healthcare coverage in retirement. Before doing so, discuss with your financial advisor and tax advisor how much to take out each year and how those distributions impact your taxes and healthcare costs today and in the future.
4. If you’re working: If you are still working when you reach your RMD age and you are not a 5% or greater owner of the business, you may be able to postpone your RMD from the employer-sponsored retirement account with the employer you currently work for until you retire.
Are RMDs required for Roth IRAs? What about inherited Roth IRAs?
RMD rules do not apply to the original Roth IRA owner. However, if you are an owner of an inherited Roth IRA, your distribution requirements depend on whether you were a spouse or non-spouse beneficiary, the year you inherited the account, if you meet certain exception criteria and how you choose to treat your inherited account.
For example, spouse beneficiaries can move the assets to their own Roth IRA instead of an inherited Roth IRA to avoid RMDs.
How can I avoid tax penalties?
Simply, the only way to avoid tax penalties is to adhere to federal law and ensure you’re withdrawing the correct RMD amount from the correct retirement accounts by the deadline. A financial advisor can help explain the tax treatment for your withdrawals.
If you do not take a distribution or if you withdraw less than the required amount, you may have to pay a penalty of up to 25% of the amount not taken. The penalty is reduced to 10% if the shortfall is corrected within a two-year window. You can take more than the required amount, but the extra withdrawals don't count toward RMDs for future years.
Generally, withdrawals of pre-tax contributions and earnings are taxed as regular income. If you have after-tax money in your IRA, those distributions will still count toward your RMD but won’t be taxable.
We can help determine your RMDs
RMD rules can be difficult to understand. While your Ameriprise financial advisor does not provide legal or tax advice, they are committed to helping you determine the correct amounts for each of your investment accounts to help you avoid tax penalties.
