If you’ve been contributing to a traditional IRA or other defined contribution plan, you will want to pay close attention to the rules regarding distributions. While you can withdraw money from your IRA anytime, you need to be under age 59 ½ to do so without the 10% tax penalty.
But how about required minimum distributions? When do those begin and what do you need to know?
At age 70 ½, you must start taking annual distributions. You need to do this by April 1 following the year that you turn 70 ½ and by December 31 of later years. This number is calculated based on your retirement account balance and a distribution period that comes from the IRS’s Uniform Lifetime Table (other tables are used depending on your age and whether you inherited the IRA or were the original owner).
If you don’t take the required withdrawal after you turn 70 ½, the penalty is 50% of the amount that should have been withdrawn. When you take these distributions, they are taxable…unless you make a charitable contribution.
Giving to an eligible charity is a great way to meet the annual minimum distribution requirement while supporting organizations that you support already. You can transfer up to $100,000 a year directly to a charity without paying income tax. If you’re filing a joint tax return, the figure is $200,000. You must make these charitable contributions by December 31.
A few things to keep in mind:
- Doing this satisfies the annual minimum distribution requirement for your IRA.
- There is no minimum distribution requirement for Roth IRAs, but the requirement stands for traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans, and other defined contribution plans.
- You cannot double dip and claim a charitable contribution tax deduction when you make a distribution to a charity from your IRA.
- You can only make this charitable contribution tax free from your IRA, not from a 401(k) or similar type of retirement account.
- If you have money in a 401(k), you could transfer the money into an IRA and then make a tax-free charitable contribution from there.
- If you have inherited an IRA, there are a few things to consider, so be sure to reach out to let us know. You’ll use a different table to calculate your minimum distribution amount if you are 10 or more years younger than the IRA’s owner, and rules are different if you were not a spouse of the IRA owner. Call us to discuss.
Questions about the annual minimum distribution requirement? Contact us today.