Saving & Investing
Don't forget to take your required minimum distribution
December 04, 2013
Amy Chain: Mary, I'd like to come back to you here. We have a question from Catherine in Sutton, Massachusetts. Catherine asks about RMDs. Catherine says, "My husband turned 70½ this month and has questions about the timing of the required minimum distribution." What can we tell Catherine to help her husband?
Mary Ryan: I got to say I'm very glad Catherine brought this up. I touched on required minimum distribution when talking about traditional IRAs and that this is something particularly at year-end is so important to make sure you're focused on in looking at it. A required minimum distribution, as I mentioned before, is something you must take from a traditional IRA or other qualified plans. One does not have to take one from a Roth IRA, however, just to be clear.
When looking at a required minimum distribution, the government says at 70½ you need to take a required minimum distribution from your IRA, and you need to take one every year thereafter. It's based on age and a formula as to what the amount is.
Amy Chain: Essentially the government's saying you've got to pay taxes some time.
Mary Ryan: They want their money, that's right. We let you have it deferred just long enough. We want your money now. Now, the one piece to this, however—and this is important for 70½ that you don't necessarily—that does not apply any other year. The year in which you turn 70½ you can defer that required minimum distribution to the next year.
So for example, in 2013, as in this case, her husband turned 70½. Let's say that he was working this year but he's planning on retiring after the 31st of this year, so next year his income would be down quite a bit.
This year he could be in a really high tax bracket and he may not really want to take that required minimum distribution for this year. And so he can postpone it to next year, 2014. Now, of course, there's always a—here you go, there's another piece to it. In 2014, however, he must take two required minimum distributions: the one he needed to take in 2013 and then the one that is in 2014. The one for 2013 he must take by April 1 of 2014. You must meet that requirement and then the other he has to take by December 31.
And to that point, as I was just saying, the reason I talk about it at year-end is people postpone taking their required minimum distribution so the dollars can continue to grow tax-deferred, which is fine. But you do not want to make the mistake of missing your required minimum distribution for the year. It's a 50% penalty if you do.
Amy Chain: 50% penalty on?
Mary Ryan: The amount that you're supposed to take.
Amy Chain: That's a very important point.
Mary Ryan: It is huge. So I'm so glad we brought that up because that was on my bucket list of things to discuss.
Amy Chain: That was the elephant in your room today.
Mary Ryan: That was my elephant, yes, RMDs, very important.
Amy Chain: Before we move off the topic of IRAs, though, we did get a clarifying question. Larry from California asked us to clarify the Roth holding period. I'm glad you brought this up, Larry. "To avoid taxes on a Roth, don't you need to hold it for at least five years?"
Kevin Wick: Yeah, that is correct.
Amy Chain: So, Larry, yes, that is correct. So you pay taxes before the money goes in. It has to sit in the account for five years, and as long as it does that, you're able to take the distributions tax-free.
Kevin Wick: Correct. Yeah, it's something, again, you want to look at as a long-term planning tool for that very reason.
Amy Chain: That's great, fabulous. Okay, Kevin, I want to ask you another charitable distribution question. Virgil from Tennessee, asks, "What procedure do I need to go through to make a qualified charitable distribution as part of my minimum required distribution from my Vanguard IRA?"
Kevin Wick: It's a good follow-up to the discussion on RMDs, and we have a unique opportunity. It's one we've seen in years past. It's an opportunity that, as we sit here today, only exists now for 2013 barring some other change, legislative change, in Washington. You have—if you are in a position to have to take an RMD, so you're at least 70½—you have the opportunity to actually direct some or all of that RMD up to a maximum of $100,000 to a charity of your choice, a public charity. And in doing so, it has to go right from your IRA provider directly to that charity. And in doing so, then you are not taxed on the amount of that distribution.
Amy Chain: And this has gotten some attention this year. This is the QDC—
Kevin Wick: QCD.
Amy Chain: Qualified charitable distribution, right?
Kevin Wick: Correct, yes, exactly.
Amy Chain: Okay, good, so for folks that maybe have heard that acronym, this is what we're talking about.
Kevin Wick: Yeah, exactly. And in the example that Mary gave, if we have the individual who doesn't need the money this year, maybe retiring next year, or even play out that scenario differently, it's an opportunity to basically not be taxed on some or all of that RMD this year. You send it to charity, it goes tax-free; the individual pays no tax on the amount that is taken out.
The flipside is even though it's going to charity, though, you do not get a charitable income tax deduction because you never paid taxes on the income to begin with. But it's an excellent way to reduce your income this year and serve a favorite charitable cause at the same time. And as far as doing it at Vanguard, it's as simple as calling up, talking to one of our retirement specialists, and they'll walk you through the steps of making that happen.
All investments are subject to risk, including the possible loss of the money you invest.
When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved.
It might be time for your RMD
What the government gives, it eventually gets—in this case, taxes on a required minimum distribution (RMD) from a qualified tax-deferred account. Mary Ryan and Kevin Wick of Vanguard Asset Management Services™ explain some available options when it's time to take your RMD.
Other excerpts from this webcast:
- The benefits of disciplined portfolio rebalancing
- Make wealth planning a part of your year-end portfolio review
- Understanding the 2013 tax law changes
- All investing is subject to risk, including the possible loss of the money you invest.
- When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
- Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
- This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved.