Sometimes it’s OK to delay the inevitable.
Generally, once you reach age 70½ or if you inherit someone else’s IRA or qualified retirement plan account, there are strict rules that require you to begin taking Required Minimum Distributions (RMDs) from the account. However, there are various ways to delay or defer the RMDs, thereby allowing you to postpone taxable income. The following are various suggestions for minimizing the tax impact of RMDs:
- IRA owners who attain age 70½ during 2016: If you reached age 70½ at any time during 2016, you must begin distributions from a traditional IRA account no later than April 1, 2017. A 50 percent penalty applies to the excess of the required minimum distribution (RMD) over the amount actually distributed.
In addition, if you wait until 2017 to take your first payment, you will still be required to take your second RMD no later than Dec. 31, 2017, which will cause you to take two payments in 2017. This “bunching” of the first two required annual payments into one tax year (2017) could cause your income to be taxed in a higher tax bracket and, therefore, result in more overall tax than if you received the first required payment in 2016.
One solution lies with charitable contributions. Assuming you otherwise wish to contribute to a charity, you could avoid being taxed in 2016 on all or part of an RMD by transferring all or part of the RMD (up to $100,000) directly to a charity. If you reached age 70½ in 2016, and you own an IRA or other qualified retirement account, we will gladly help you navigate these rules to your best advantage.
- Tax-free IRA payments to charities if you are age 70½ or older: For the past several years, we have had a popular rule that allows taxpayers, who have reached age 70½, to have their IRA trustee transfer up to $100,000 from their IRAs directly to a qualified charity, and exclude the IRA transfer from income. The IRA transfer to the charity also counts toward the IRA owner’s RMDs for the year.
If you wish to contribute to a charity and you are at least 70½, this tax break effectively allows you to exclude all or a portion of your otherwise taxable RMDs from taxable income. This, in turn, could allow your 2016 modified adjusted gross income (MAGI) to stay below the thresholds for various credits and deductions for 2016 that would otherwise be phased out as your adjusted gross income increases.
In addition, this could potentially reduce the portion of your Social Security payments that would otherwise be taxable. Moreover, in future tax years, this exclusion could reduce the amount of your Medicare Part B and Part D premiums, which generally increase as your MAGI increases.
To qualify, the check from your IRA must be made out directly to your designated charity. In addition, if the contribution is $250 or more, you must get a timely, qualifying receipt from the charity for the charitable contribution.
As a result of the PATH Act, this provision is now permanent. To take advantage of this exclusion for 2016, the “direct transfer” from your IRA to the charity must be completed by Dec. 31, 2016. It may take the IRA custodian several days to complete all the necessary paperwork to complete the transfer, so you should start the process of transferring the funds from your IRA to the charity as soon as possible. Please let us know if we can be of assistance.
Source: Don Farmer, CPA