Advantages of Accelerating RMD from Qualified Plans and IRAs

When it comes to taxes, reaching age 70-1/2 is an important milestone. That’s because you have to start taking minimum annual distributions from your traditional IRAs when you reach age 70-1/2. And if you’ve already retired from your company, you also must begin making withdrawals from your company retirement plan as well. If you don’t take these minimum distributions when you’re supposed to, you could get hit with a 50% penalty tax.

When must these minimum distributions begin? If you reach age 70-1/2 in 2014, you actually have until April 1, 2015 to take your first year’s distribution, namely the one for 2014 (your age 70-1/2 year). However, if you wait until 2015 to take this distribution, you may wind up loading too much income into 2015. That’s because you’ll also have to take your second year’s annual minimum distribution in 2015, since the extended deadline until April 1 is available only in the first distribution year. That could have unpleasant tax consequences. For example, you may be pushed into a higher tax bracket in 2015. Additionally, you may be hit with a larger tax on social security benefits in 2015, and saddled with larger cutbacks for deductions (such as for medical expenses) that have an adjusted-gross-income-based “floor.”

The decision whether or not to accelerate minimum distribution payouts is not an easy one, and is not necessarily the best choice. People should discuss their options with their CPA, taking into account their overall financial picture. You should review your financial and tax situation, and determine whether you’d be better off beginning required distributions this year, instead of next.

Davis & Hodgdon Associates has been assisting individuals and businesses in the Burlington Vermont Metro area for more than 20 years. If you have any questions or concerns please feel free to call 802.878.1963 or email [email protected].