If you have an individual retirement account (IRA), you generally must start taking annual IRA withdrawals in the year you turn 72. These withdrawals are referred to as required minimum distributions (RMDs). You may always withdraw more than the annual RMD amount, but if you withdraw less, you may pay a 50% penalty on the amount not withdrawn as required.
For the first year you are required to take RMDs, you may choose to postpone your distribution until April 1 of the following year. For each year thereafter, you must withdraw your RMD by December 31. If you wait until the following year to withdraw your first RMD, you must also withdraw your second RMD by December 31 of that year – causing both RMDs to be taxed in the same year.
Not everyone needs the money they’re required to withdraw, and receiving the distribution could have tax consequences – such as pushing you into a higher income tax bracket, which can influence the income taxability of your Social Security payments and the amount of your Medicare premiums.
One strategy to consider – especially if you have charitable organizations you want to support – is to make a qualified charitable distribution (QCD). If you are 70½ or older, you may use QCDs to donate up to $100,000 from your IRA per year to qualifying charities. If you are 72 or older, these QCDs may be applied against your RMD balance and reduce your adjusted gross income on your taxes.
You may make a QCD as long as:
- The organization qualifies under IRS guidelines
- You donate to the charity directly from your IRA – you cannot personally receive the money and pay the charity yourself
When making a QCD, keep in mind such distributions are not taxable, so you cannot claim charitable income tax deductions for them. You instead must claim a tax exemption for your QCD on your income tax return. Additionally, if you are married and filing jointly, the annual $100,000 limit applies separately to each spouse who has reached age 70½.
Answers to 5 Common IRA RMD Questions
- What if I have multiple IRAs?
Your RMD must be calculated separately for each IRA, but you can take your total RMD from any one – or multiple – of your traditional or SIMPLE IRAs.
- Can I satisfy my IRA RMD with a Roth IRA?
No, you cannot. Because Roth IRAs are not required to take RMDs, a distribution from your Roth IRA does not satisfy your RMD for a traditional or SIMPLE IRA.
- Can I satisfy my IRA RMD with my 401(k) plan?
No, the RMD for a qualified retirement plan – such as a 401(k) or 403(b) – cannot be used to satisfy an IRA’s RMD. Likewise, your IRA’s RMD cannot be used to satisfy your qualified retirement plan’s RMD.
- What if I want to roll over my qualified retirement plan to an IRA?
If you have a qualified retirement plan that contains an RMD balance, you must first take the RMD before you roll over the plan to an IRA.
- How do I calculate my IRA RMD?
- Add the balances from your traditional or SIMPLE IRAs as of December 31 of the prior year.
- Most IRA owners will use the IRS Uniform Lifetime Table to determine your distribution period. (The IRS updated this table in late 2021, and those changes apply to RMDs for 2022 onward.) If your spouse is the sole beneficiary of your IRAs and is more than 10 years younger than you, refer to the Joint Life and Last Survivor Expectancy Table found in IRS Publication 590-B at IRS.gov. The Uniform Lifetime Table is never used to calculate required distribution on inherited IRAs.
- Divide your December 31 account value(s) by your distribution period to get your RMD.
For example: John Doe has an IRA with a balance of $100,000 as of December 31, 2021. John turns 75 in 2022, and the distribution period for a 75 year old is 24.6. To calculate John’s RMD, divide 100,000 by 24.6; John’s RMD for 2022 would be $4,065.04.
Qualified charitable distributions can be a good option in the right circumstances, but they may not be the best charitable giving strategy for everyone. If you are considering a QCD, we encourage you to visit with your tax professional first. Then, contact Bell Bank Wealth Management for help with your RMD calculations, qualified charitable distributions or setting up an IRA!
VP/IRA Services Coordinator
701-451-3027 | firstname.lastname@example.org
This article has been written for the general information of clients and friends of Bell Bank. It is not intended, nor may it be relied upon, as tax or legal advice with respect to any matter. This newsletter also cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service or other taxing authority.
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