Financial advisors say there are ways to efficiently satisfy required minimum distribution rules that can even make the legal requirements work to a client’s benefit.
Distributions in IRAs and qualified plans have to begin when the owner turns age 70-1/2 or after a spouse of beneficiary inherits a qualified investment.
But satisfying the tax law can also be used as part of a strategy to make a client’s retirement portfolio more efficient.
For instance, while RMDs are required on the total amount of all IRA accounts held by a client, that total can be taken from any account or combination of accounts, according to Warren Ward, a certified financial planner with Warren Ward Associates, Columbus, Ind.
An advisor can recommend that the RMD be taken from the “least suitable account, perhaps an IRA annuity with lots of internal costs and significant surrender charges,” he says. The reason, Ward explains, is that charges are usually waived in the case of RMDs.
When a client turns age 70 1/2 , an RMD can be taken that year or by April 1 of the following year, explains Jeremy Portnoff, a certified financial planner with Portnoff Financial LLC, Westfield, N.J. But if the RMD is delayed until the following year, another RMD must be taken for that year, for a total of two, he adds.
Consequently, a client’s income in the following year and the possible tax consequences if the client is pushed into a higher tax bracket must be considered before a decision is made, he adds. If the client is pushed into a higher bracket, more of that client’s Social Security benefits may be taxable, he says.
“There is a nasty interplay of RMD and Social Security payments that can affect clients whose primary income is Social Security and medium sized IRAs,” says Tom Davison, a certified financial planner with Summit Financial Strategies, Columbus, Ohio.
The interplay, he explains, comes when single clients are pushed into an effective marginal rate of 46% for federal taxes and married couples that are filing jointly end up in the 28% tax bracket rather than the 15% bracket, he continues.
One good tax planning feature about the RMD, however, is that you can withhold any amount needed from the IRA distribution, Davison explains. With some clients, his firm schedules IRA distributions later in the year to see that there are sufficient tax withholdings or whether additional holdings are necessary so clients will be “penalty proof for that year.”