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Year End Planning – Check off your RMDs from your “To Do” list

It’s that time of the year again. Time to make sure that any year-end financial items are taken care of before the end of the US tax year. I know, it is one more thing to do on the never ending list that always seems to grow longer as opposed to shrink. But, there are some things that are very important to take care of due to the potential high cost of not doing so.

One of those items is making sure that any Required Minimum Distributions, otherwise known as RMDs, are taken from US retirement accounts each year. If you do not take your required distributions, or if the distributions do not end up being large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

The US does not allow individuals to keep money in their retirement accounts indefinitely.  Distributions are allowed to begin at age 59 ½. However, generally distributions are required to begin by 1 April of the year following the calendar year in which you reach age 70 ½. This is the case for IRAs, including SEP and SIMPLE IRAs (Roth IRAs are not subject to RMDs and can remain invested without distributions until death). For 401ks and other company sponsored defined contribution plans it is generally possible for distributions to begin later if you remain employed full time with the company in the year distributions would otherwise begin. If this is the case, distributions from the company retirement plan can be delayed until the year of retirement. Different distribution rules apply to Inherited IRAs.

These rules mean that if your 70th birthday was in the first half of 2016 (1 January through 30 June) that you must take your first RMD by 1 April 2017. However, if your 70th birthday was in the second half of 2016 (1 July through 31 December) your first RMD is not required until 1 April 2017. Subsequent RMDs are then required to be taken by 31 December each year.

For anyone not paying attention, and not requiring the funds to meet their everyday living expenses, the first RMD might easily be overlooked. If you wait to take your first RMD until Q1 of the tax year, you generally will end up having two RMDs in the calendar year.  If you want to avoid having both of these amounts included in your taxable income in the same year, then you could choose to take the first RMD by 31 December of the year in which  you turn 70 ½ instead of waiting until 1 April of the following year. The ability to time the recognition of that income relating to the first RMD may be a useful planning opportunity. There might be a case for accelerating the income into the earlier tax year to smooth overall taxable income and keep marginal tax rates down, or delaying the income into the next tax year if marginal tax rates will remain the same or in fact be lower. This depends on individual circumstances and other sources of income. Either way, make sure you do not ignore your RMDs and ensure you have a deliberate plan to take the distribution when most advantageous for you.

For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.

Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.

MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice.  MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.

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