RMD season is approaching: Contact clients now to discuss potential strategies

RMD season is approaching: Contact clients now to discuss potential strategies

While some clients cannot avoid taking required minimum distributions (RMD) from certain retirement accounts, there are some options you can present to minimize the tax burden.

As the end of the year approaches, it is a good time to discuss these ideas and ask your clients to consider alternatives.

For clients who do not rely on their RMDs to meet current expenses, there are some strategies to think about:

  • Make a tax-free donation to charity. Clients may donate up to $100,000 tax free from an IRA to a qualified charity. By making the donation, they can avoid reporting extra taxable income that could affect alternative minimum tax status, taxability of Social Security benefits, or the taxability of Medicare Part B premiums.

It is also important to note that this provision, which applies to IRAs, expires at the end of 2011. You may want to contact clients promptly.

For more information, download our Donating IRA Assets to Charity investor education piece.

  • Help grandchildren save for college. Clients who are grandparents may also choose to use RMDs to fund 529 college savings accounts for grandchildren. Although the distribution still needs to be reported as taxable income, once the funds are inside a 529 plan, they will grow tax free and can be distributed tax free for qualified higher education expenses. As an additional benefit for the grandchild, a 529 account owned by grandparents is not currently considered in the calculation of a student’s eligibility for federal financial aid.

Keep in mind though, there are limits to gift amounts.

The Internal Revenue Service has specific rules for RMDs, and penalties for not taking these distributions or following the tax guidelines. As clients get ready for tax season, it is a good time to review these rules.

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