How retirees can make required minimum distributions pain free

Stocks had a rocky close to 2018.

That doesn’t mean your required minimum distribution from retirement accounts will be lower this year as a result.

RMDs, as they are commonly known, are the minimum amount individuals who are age 70½ and older must take out of their retirement funds such as individual retirement accounts or workplace-based accounts such as 401(k) plans. If you’ve inherited a retirement account, you may also have to take money out.

The amount you take from year to year is based on specific calculations, including what your account values were as of Dec. 31 the prior year.

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Last year, the total annual return for the S&P 500 Index was -4.38%, the worst performance in a decade, said Jeffrey Levine, director of financial planning at Blueprint Wealth Alliance.

Yet you probably won’t notice a big change in your RMD amount from last year, he said.

“A difference of 4% in the account balance is not going to make that much of a difference,” Levine said, even if you were 100% invested in the S&P 500. If you had a more traditional portfolio, you probably saw even less of a swing from one year to the next, he said.

Plus,  the fact that you’re one year older could bump up your RMD slightly as well, since the numbers are based on IRS longevity tables.

The best time to get started on your RMD for this year is right now. That’s because the amount you need to take out is already locked in. But the paperwork may take some time to sort through.

And the sooner you start, the more likely you are to meet the Dec. 31 deadline. (You have until April 1, 2020 if you just turned 70½ this year.) These tips can help.

In order to know how much you have to withdraw, you have to have an accurate picture of what you own.

Start by coming up with a list of those accounts.

“Always take an inventory first, so you know where all your retirement accounts are, so you don’t miss any,” said Ed Slott, CPA and founder of Ed Slott & Co.

It’s a good habit to get into — and not only at RMD time — so you know where all of your funds are, he said.

Also, be careful not to mistake an IRA for another type of account, which can lead you to miss your RMD, Levine said.

Have your RMD calculation double-checked either by your financial institution or financial professional, Levine recommended.

That is because the initial math sometimes can be off. For example, if you’re married and have a spouse who’s more than 10 years younger, you could have a higher than necessary RMD if that’s not taken into account.

Or, if you did a rollover mid-year, your new custodian might not have your Dec. 31 account value, or tell you you don’t need to take a withdrawal when you do.

“Just double-check and make sure you have the right amounts,” Levine said.

If you have multiple IRAs, you can take your total RMD from any one of those accounts.

That’s because of what’s called an aggregation rule.

However, with multiple IRAs, you still have to calculate the amount you take out based on the value of all of them, Slott said.

The same rule applies to multiple 403(b) retirement accounts, which you might have if you are or were an employee of a public school or tax-exempt organization.

That rules does not apply to 401(k) plans. If you have multiple 401(k) accounts, you have to take money from each one.

What’s more, you can’t take an RMD from an IRA to satisfy a 401(k), or vice versa.

“You can’t ever take from one category of account to satisfy an RMD on another one,” Slott said.

If you’re 70½ and still employed, you could get a break from taking your RMD, but only in certain circumstances, Slott said.

Generally, 401(k) plans have a still-working rule, which means you do not have to take the RMD until you retire.

Of course, there is a catch: You can only put off the RMDs if the plan is attached to the company where you’re currently employed. Other accounts — such as a 401(k) from a previous employer or IRAs — are excluded. So you do still have to take distributions from those.

“You only get the break on the plan of the company you’re still working for,” Slott said.

If you’ve inherited a retirement account, you may also be on the hook to take an RMD by the end of this year.

That generally doesn’t apply to you if you inherited the money from your spouse. That is because spouses can do a rollover and keep deferring those distributions, Slott said.

If you’re a non-spouse beneficiary, you likely still have to take a distribution by the end of this year. If you inherited the account in 2018, you will need to take your first RMD in 2019.

There’s more: this rule applies to both traditional IRAs, as well as Roth IRAs, Slott said.

RMDs from a Roth IRA will likely be tax-free. If you fail to take that money out, you will have to pay a 50% penalty on the sum you should have taken.

How you deal with the taxes on your RMDs depends on your preference. But you should have a plan, Levine said.

If you pay estimated quarterly taxes, you may not want to withhold anything from your RMD.

Or, you may decide instead to withhold from your RMD rather than make those quarterly payments. Some of Levine’s clients withhold 100% of their RMD to avoid having to deal with estimated taxes throughout the year.

“There’s not necessarily a right or a wrong way to do that,” Levine said. The key is to find the right strategy for you, while making sure you take into account your other income and overall taxes you will owe, he said.

One way to avoid paying taxes on your RMD: Give the money to charity.

A qualified charitable distribution allows you to make donations to a charity directly from your IRA.

So if your RMD is $5,000 and you typically give $5,000 to charity each year, you can donate that money and not pay tax on it.

“That’s a great way to give to charity, especially since the new law passed where most people don’t get the tax deductions anymore for their charitable contributions,” Slott said.