November 3, 2015
As the year draws to a close there are many concerns running through our minds. Of course there are the holidays. There is the concern that our investment portfolio’s current year status is as balanced as it can be. And there is the need to assure ourselves that we have properly handled our Individual Retirement Account (IRA).
Many IRAs are controlled by the sponsoring organizations or funds, and they advise the IRA owner of the need to take the required minimum distribution (RMD), if necessary, before the end of the year. The RMD is necessary for any IRA owner on or before the April 1st following the year they attain the age of 70 ½. To avoid having two RMD withdrawals included in the owner’s income for the same year, the owner may make the first withdrawal by December 31 of the year they turn 70 ½ instead of waiting until April 1 of the following year. Failure to withdraw the annual RMD could expose the IRA owner to a penalty tax equal to 50% of the excess of the amount that should have been withdrawn over the amount that actually was withdrawn. This penalty is significant.
While many, perhaps most, plan sponsors are aware of the need for this mandatory withdrawal, it is not technically their responsibility to advise the owner. The responsibility and the penalty are the owners. So as we near the end of another year we should be reviewing our IRAs, 401Ks and other retirement plans to be certain that any required withdrawals have been made. This is stated in the plural because over time many of us have established multiple IRAs.
The benefit of having multiple IRAs, not including other retirement plans such as 401Ks is that the RMD from each plan must be calculated separately, but the total can be accumulated and withdrawn from one plan. This permits the owner to pick and choose among the plans that he or she owns based on such measures as plan performance.
IRAs held by a beneficiary cannot be aggregated with amounts held in IRAs that are individually owned. And no traditional IRA can be aggregated with a qualified retirement plan (401K, etc.) or a Roth IRA to determine payouts.
This year 2015 produced another challenge in planning for the IRA distribution. Through 2014 IRA owners aged 70 ½ were able to satisfy their RMD by directing the IRA trustee to make the distribution directly to a generally recognized charitable organization. Thus the distribution requirement was satisfied, taxpayer’s charitable intent was completed, and the distribution was excluded from the owner’s gross income. The offset to this exclusion was that the charitable contribution could not be deducted on the tax return, but because of the exclusion from gross income the decreased amount of gross income afforded benefits to those many provisions in tax law limiting amounts of deductions, credits, etc. to percentages of gross income. To this date we are not certain this ability to direct IRA distributions to charity and secure an exclusion is available in 2015. The law has been passed late in the year by Congress, so we are hopeful. Therefore, if you are inclined to take advantage of the choice for the annual distribution we recommend you wait until late in the year to take the minimum distribution, unless Congress acts sooner. We are optimistic.
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