One Possible Way to Avoid Being Taxed on Required Minimum Distribution
On January 1, 2013, the U.S. Congress passed the American Taxpayer Relief Act (“ATRA”). The ATRA provides at least one potential strategy to avoid the income taxes normally associated with Required Minimum Distributions (“RMD”).
What is a Required Minimum Distribution or RMD?
The year after a person reaches the age of 70 1/2, the individual must make an annual withdrawal of a minimum amount of money from his retirement account (IRA, 401(k), 403(b) plan, etc.). A RMD is the minimum amount a person must withdraw. Generally the RMD is calculated by dividing the total balance in the account by a life expectancy factor provided by the IRS. As a penalty for failing to withdraw the RMD, the amount not withdrawn is taxed at 50% if the account owner fails to withdraw the full value of the RMD.
How are RMDs Taxed?
The account owner is taxed on the RMD at the account owner’s income tax rate. This may create problems for individuals with alternate revenue streams who do not need the money from the retirement account.
How Does the ATRA Help Me Avoid Being Taxed on a RMD?
Under the ATRA, individuals may make donations up to $100,000 to charities directly form an IRA, and the amount donated will not be included in the account owner’s adjusted gross income. In short, an IRA holder who is forced to take an RMD but wants to avoid being taxed on the amount withdrawn, may make a charitable donation out of the RMD and avoid the taxes normally associated with taking the withdrawal.
Estate planning involves the careful preparation of affairs to ensure that individuals and their heirs receive the greatest benefit from the individuals earnings and assets acquired throughout life. Estate planning is complicated and varies by the individual, and individuals should seek the advice of a qualified attorney or estate planner when developing his or her estate plan.
