As we enter the last quarter of the year, older taxpayers need to check and make sure they take their required minimum distributions (RMDs) for the year. Significant penalties apply to taxpayers who do not take the required amount from their IRA or qualified retirement plan accounts.
All taxpayers must start taking annual RMDs from their IRAs by April 1st following the year in which they attain age 70 1/2. Taxpayers who are more than 5% Owners (defined below) must also start taking RMDs from their qualified retirement plan accounts by April 1st of the year they reach age 70 ½. However, taxpayers other than 5% Owners may delay taking annual RMDs from qualified retirement plan accounts until April 1st of the year following the later of the year the taxpayer (a) reaches age 70 1/2, or (b) retires.
Taxpayers who fail to withdraw the annual RMD are subject to a penalty tax equal to 50% of the amount that should have been withdrawn but was not. The amount of RMD is calculated separately for each IRA. However, the RMD amounts for separate IRAs may be totaled and the aggregated RMD amount may be paid out from any one or more of the IRA accounts.
This rule gives flexibility to owners of multiple IRAs. For example, if an IRA is invested in stocks or mutual fund shares whose price currently is depressed, the minimum distribution can be made from another IRA invested in a fund showing gains to avoid selling at a market low and losing future appreciation potential. Some financial institutions automatically place each year’s RMD in a separate non-IRA account. This procedure avoids the risk of penalties for insufficient distributions, but may create investment losses that could have been avoided. A taxpayer with multiple IRAs who does not want to take his RMD from a particular IRA should notify the IRA custodian that the taxpayer is taking the RMD from another account and does not want to withdraw RMD from that particular IRA.
The rule permitting amounts in traditional IRAs to be aggregated for RMD purposes applies only to IRAs that an individual holds as an owner. It doesn’t apply to IRAs that an individual holds as a beneficiary. IRAs held by a person as a beneficiary of the same decedent may be aggregated, but cannot be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent. An IRA cannot be aggregated with a qualified retirement plan account. RMDs must be calculated and paid separately for each qualified plan account.
For pre-2014 distributions, an annual exclusion from gross income (not to exceed $100,000) was available for otherwise taxable IRA distributions that were qualified charitable distributions. Such distributions were not subject to the general percentage limitations that apply for making charitable contributions since they were not included in gross income and could not be claimed as a deduction on the taxpayer’s return. Since a qualified charitable distribution was not includable in gross income, it did not increase AGI (Adjusted Gross Income) for purposes of the phase-out of any deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified levels.
To constitute a qualified charitable distribution, the distribution had to be made after the IRA owner attained age 70 1/2, and (2) directly by the IRA trustee to charitable organization. The annual exclusion expired at the end of 2013. But the exclusion has been retroactively extended several times. Taxpayers who would benefit this year if the qualified charitable distribution were available should consider deferring their RMD for 2014 until near the end of the year. That way, if the charitable contribution deduction is revived for 2014 before the end of this year, the taxpayer can elect to make qualified charitable distribution rather than taking an RMD.
Please contact me at 937-223-1130 or email@example.com to discuss any questions or comments you may have about RMDs, qualified retirement plans or federal income taxes.
AND ONE MORE THING. Significant valuation discounts are alive and well. The Court of Appeals for the Fifth Circuit has reversed the Tax Court’s finding that only a 10% fractional ownership discount applied to an estate’s fractional share in artwork, and instead ruled that the 45% valuation discount argued for by the taxpayer applied. When valuing real or personal property for estate or gift tax purposes, valuation discounts can and should be taken to account for lack of marketability and lack of control. Please call or email me at 937-223-1130 or Jsenney@pselaw.com if you are handling an estate or contemplating making significant gifts.