Most retirees, beginning at age 70½, must take specific required minimum distributions (RMDs) from retirement accounts each year. Because the penalty for not making a withdrawal is steep — 50% of the amount required — many advisors encourage investors to take care of it before year-end.
But year-end is also time to remind investors of situations where they are not required to take distributions, even if they are older than 70½.
Here are two instances in which investors do not have to take an RMD:
1. Roth IRA account owners. There are no required distributions for Roth IRAs. However, for inherited accounts, heirs must take minimum distributions. It is important to note that a spouse inheriting a Roth IRA has the option of avoiding the RMD by transferring the ownership of the account into his or her own Roth IRA. A non-spouse beneficiary does not have this option.
Also worth noting — minimum distributions are required from designated Roth accounts within employer retirement plans, including 401(k), 403(b) and 457 plans. Before reaching age 70½, participants in these accounts should consider rolling over amounts into a Roth IRA outside of the employer plan to avoid having to take minimum distributions.
2. Plan participants who are still working past age 70 ½. Participants in an ERISA-qualified workplace retirement plan can delay RMDs while they are still working (referred to as the “still working exception.”) However, there are certain requirements: The participant may not own 5% or more of the company, the plan must allow delayed RMDs, and the participant must be employed throughout the year. In this case, RMDs can be delayed until April 1 of the year following the year that the employee stopped working.
Investors who cannot avoid taking an RMD may be able to avoid reporting an RMD as income on their tax return by using the charitable rollover option. With this provision, account owners age 70½ may direct up to $100,000 to a qualified charity without triggering income tax.
It is important to understand how these tax strategies may affect an overall retirement plan, and investors should consult with a professional advisor or tax expert.