‘Tis the season for RMDs

Another year flew by and the holidays are already here. Snowflakes are falling, houses are decorated, and families are reunited! In the midst of all the joy, it’s easy to put your finances aside. However, if you will be over 70.5 years old by the end of the year, we want to remind you that it’s time to take a Required Minimum Distribution (RMD) from your IRA or retirement account. An RMD is designed to ensure that you withdraw at least a portion of the funds in your account over your lifetime – and that you pay taxes on those funds. Taking your RMD is important because the stakes are high! Failure to withdraw the required minimum will result in a hefty penalty: The amount that was not withdrawn is taxed at 50%. In other words, if the RMD on your traditional IRA is $8,000 in 2013, but you only withdraw $3,000 during 2013, you will be subject to an excise tax of $2,500 (50% of the amount by which the RMD exceeds your actual distribution). It’s quick and easy to arrange your RMD by calling your financial advisor. We recommend you do so by December 15th to ensure plenty of time for the distribution to occur before the end of the year. The sooner you get it done, the more time (and money!) you will have to spend with the ones you love.

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Charitable IRA distributions renewed for 2013

We have great news for people making charitable gifts this year! Thanks to the American Taxpayer Relief Act of 2012 (ATRA), IRA owners can once again make a qualified charitable distribution (QCD) from an IRA to a qualified charity of their choice.

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works:

For this year, IRA owners who are 70 ½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to a qualified charity(ies). Additionally, the IRA owner can exclude the amount of the QCD from his or her gross income on their 2013 tax return. The amount of the QCD excluded from the gross income is not included when determining any deductions made to qualified charitable organizations.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You are only eligible to make a QCD if you are 70-½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and 30% public foundations are not eligible to receive the QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning that the check issued from your IRA must be payable to the charity. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning that 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor. The donor cannot receive any economic benefit as part of the gift.

At this time, the QCD provision is only extended through the end of 2013. We do not know if the provision will be renewed in years beyond. If you are interested in making a donation directly from your IRA to a charity, reach out to your advisor to get started and make 2013 a year of giving!

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What is a Required Minimum Distribution (RMD)?

The RMD is the amount that Traditional, SEP, SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts in the year in which they reach 70.5.  The RMD must then be distributed each subsequent year.

The standard deadline for taking your RMD is December 31st.  However, you can use a one time exemption for your first RMD and delay until April 1st of the following year.  If you choose to utilize this deferral you will have to take both your first and second year distributions that year.

The amount of your RMD is calculated by dividing the year end value of all of your IRAs by your distribution factor.  Your distribution factor can be found using the IRA Uniform Lifetime Tables which are prepared by the IRS.

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Year-end tax planning

Our friends at Thomson Reuters have provided another wonderful checklist of year-end tax planning opportunities. As we enter the final week of the year, it’s worth considering if any of these options can save you money. (more…)

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RMDs and Charitable contributions

If you have IRA accounts and are over age 70 ½, then you probably know about the Required Minimum Distribution (RMD) rules. These IRS rules require you to take money out of your retirement accounts each year, whether you need the money or not.

This money could be spent or re-invested back into a taxable investment account to allow it to continue to grow. Some people deposit this money to their checking account, and eventually use it to make a charitable contribution to the charity of their choice.

Fortunately, the government recently extended a provision through 2011, which allows individuals over age 70 ½ to exclude up to $100,000 from their gross income if it is paid directly from an IRA to a qualified charity. In addition, that excluded amount can be used to satisfy the RMD for the year.

This could potentially be a much more tax-efficient way to make charitable contributions than by depositing the RMD amount in your bank account and then writing a check for charity. If you’re a Merriman client, we can help you complete the paperwork accordingly, just give us a call.

To find out more information on this valuable topic, please discuss with your CPA or read this article from the IRS.

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It’s RMD time here at Merriman

To make the Required Minimum Distribution (RMD) process easier, we recommend having the distribution set up to go out automatically each year so you don’t have to think about it. It’s easy to do, and most custodians provide a number of options. You can specify the day of the year it should be withdrawn and have it sent to you by check, direct deposit, or have it transferred to another taxable account at your custodian.

If you’re a Merriman client and you want to set up automatic distributions to take care of your RMD, please give us a call and we’ll help you set it up.  To learn more about RMDs click here.

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