Saving Taxes On Required Minimum Distributions

Harold Goedde

Taxpayers who have a tax deferred retirement plan (e.g., a 401K, 403B, 457B) or an IRA must take a required minimum distribution (RMD) when they reach age 70 ½ which is reported as ordinary income. In the year you become 70 ½, you can defer the first distribution until April 15 of the following year.

In subsequent years, the distribution must be taken by December 31. If you don’t take any distribution or only take part of it, you will have to pay a penalty of 50% on the difference between the RMD and the amount taken. The RMD is computed by multiplying the value of the account at the end of the preceding year by an IRS mortality factor. The plan administrator can tell you how much the RMD is. If you are still working and covered by a tax deferred retirement plan when you reach age 70 ½, a RMD is not required until you retire.

Tax Savings

In 2015, Congress made permanent a provision that allows taxpayers taking a RMD to designate part or all of it to be given to charity but the donation must be made directly by the plan administrator. A charitable donation from a RMD results in tax savings because that portion of the RMD is not taxable. If the taxpayer receives any of the distribution designated for charity, it will be taxable as ordinary income and an itemized deduction must be taken for the amount given to charity. Making a charitable donation from your RMD is most favorable for taxpayers who take the standard deduction. Their charity gets the donation even though they can’t take an itemized deduction for the donation. Taxpayers who desire to do this must tell the plan administrator which charities are to receive a donation and how much.

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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