Have you taken your Required Minimum Distribution (RMD) yet? For investors over the age 70 ½ with an IRA, SEP IRA, SIMPLE IRA, or retirement plan, your RMD is the amount that you need to withdraw from your account by the end of the calendar year. Whether or not you need the money, the IRS requires you to take the money out of the qualified account and pay income taxes on the entire amount.
For an individual who turned 70 on January 23, 2015 with a $500,000 qualified account would have a first year RMD of $18,248.18. For many people this is welcomed income needed for living expenses. There are others that have more tax efficient accounts to take money from or do not need the income to live off of. In this case, it is just a reason for the IRS to make you pay extra taxes each year.
Fortunately, for those who are charitably inclined, you can make a direct transfer to a qualified charity and avoid paying taxes on that amount up to your total RMD for that year. If you are subject to RMDs and wish to make a charitable donation for the holiday season you should consider donating directly from your qualified account to avoid income taxes on that amount. In the future, if you already make cash donations to a qualified charity on a regular basis, consider planning ahead to make those donations directly from your qualified account rather than using cash on hand. However, if you take advantage of this tax benefit, then you lose the opportunity to list this donation as an itemized deduction when you file your taxes. Consult your financial and tax professionals as to which option is best for you.
Also, for those investors who do not need the money from their RMDs for living expenses, consider Roth conversions or a Qualified Longevity Annuity Contract (QLAC) as a way to try to mitigate or eliminate RMD burdens.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risk including loss of principal. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.