This ridiculous regulation applies to people over the age of 70.5. You might be that age, know someone that age like a parent, or you hopefully will be that age some day. Does not hurt to plan ahead because this is a terrible tax rule.
After You Reach The Age Of 70.5, If You Have Any Money In An IRA Type Account, You Will Have To Start Taking Money Out Whether You Want To Do So Or Not
There are so many nuances that you should discuss this situation with a professional. There are some elementary nuances that I will list, BUT seek advice now. The money you save could be your own or a parents, relatives, friends, or others.
My Disclaimer: I Am Not Giving Tax Advice In Any Way, Shape, or Form. Do Not Act On These Musings
I am only hoping to list some thoughts that I have so that people will take notice and see professionals. Be sure the person you entrust knows what is really what. Not all professionals know the nuances.
Here Are Some Thoughts:
In most instances, people over 70.5 years of age must start taking a distribution each year out of their IRAs, SEP, Simple IRAs, 401Ks, and 403Bs.
There are some exceptions, such as: If you are still working for a company where you do not own more than 5% of the company and are using their plan, then you do not have to use any amounts from that company’s plan in calculations. But I would advise you to check this exception. The information about RMD and the tables to calculate amounts due are in IRS Code Section 590B.
An Example From Kiplinger:
If you had IRAs worth a total of $200,000, and you were 72 years of age, your RMD would be around $7,813 about 3.9% (from a 2018 article).
That does not seem too drastic, but let’s say that you had IRAs of about $1M. You would have to take out about $39,065. Now, we are talking money that you might want later. If you are working, that money would be very taxable. If you’re having a good money year, the tax could be quite high.
If You Do Not Make The Distribution In A Timely Fashion
The penalty is 50% or about $19,532 on the $39K.
Ouch. There is a form that you can use to request a waiver of the penalty (IRS 5329), but this is an appeal not an automatic cancellation.
If You Are Married To Someone More Than Ten Years Younger
You can use a different table which could lower the amount to distribute. This is based on the age of your spouse.
On The Example Of The 72 Year Old Who Had To Distribute $39,065:
If she were married to someone 20 years younger, the amount would be around $28,600.
Why? I have no idea, just take the lower percentage.
There Is A Tax Saving Procedure Using The RMDs
You could wait until December and take out the amount for the year. It is treated as if it came in during the year, so you would not have to file quarterly estimates.
With the standard deductible being increased and deductions being revoked, IRS auditors do not have much to audit. They will look for items like Real Estate Professionals Deductions, 1031 Exchanges, and maybe RMDs. There is a lot of potential for IRS penalties in the RMD game. Just an alert.