RMD – What Is This? Part One

Every year we hear that you need to make sure you take out your RMD (Required Minimum Distribution) from your qualified accounts. Once you reach the age of 73 you must begin withdrawing from your accounts a required minimum distribution based on IRS guidelines. Should you just take your RMD or should you take more from the account?

Earlier this year, I was at a friend’s house and he was a caregiver for his deceased father’s friend. He was telling me that for years he was handling this lady’s finances and he told me she was only on social security and he only took her RMD for many years. He was happy that she never had to pay any taxes for years for those years. Now I delivered him the bad news. All of the money left in her IRA is now taxable to her estate beginning at a tax rate of 37 ½ %. He was stunned at the news and how much the taxes would be. We did lower the tax rate by distributing the funds to beneficiaries and having the beneficiaries pay the taxes at their rate.

What could he have done to reduce the taxes? I explained to him that he could have taken thousands of additional dollars out of the IRA annually and still paid no taxes. I explained that it is okay to take more than the RMD. Everyone should look at RMD and calculate whether or not you can take out a larger distribution and pay no taxes or pay taxes at a lower tax rate.

I cringe when I hear people say they only take their RMD. My immediate response is that is what the IRS wants you to do because in the future the IRS will get the tax money at a higher rate. My friend said to me why isn’t this publicized more and how come he didn’t know about this. I explained that this is how the IRS gets higher taxes. With proper planning, over $10,000 would have been saved in taxes all by taking more than the RMD. There are many ideas and tips on why you should take out more than your RMD. In future articles, we will discuss some of the techniques. One tip for sure is to discuss yearly with your tax preparer how much more than the RMD you can withdraw and still be taxed at a lower rate. The goal is to pay our fair share in taxes but no more. If you can lower the amount of taxes, that is the best strategy.

Questions, comments or ideas about future articles contact me at jurban.gcu@GCUusa.com

Atty. John J. Urban