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IRA’s & Qualified Plans

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Q: At what age do I need to start taking Required Minimum Distributions?

A:  You will need to start taking the required minimum distribution (RMD) at age 72. The beginning age for RMDs changed in December of 2019 with passage of the SECURE Act.  Prior to 2020, RMDs started in the year you turned 70 1/2.

Do not confuse the age at which you are required to take a minimum distribution (72) with the age at which you can take a distribution without penalty (59 ½).

Also, your RMD must be withdrawn by 12/31 each year. However, the IRS gives you an extra three months the first time you are required to take an RMD (until 4/1 of the following year).

Here’s the problem with that: Suppose you turn 72 in 2020, but you wait until 4/1/2021 to take your 2020 RMD. You would still be required to take your 2021 RMD by 12/31/2021, so you end up taking two RMDs in the same calendar year. This could push you into a higher tax bracket. So, I recommend withdrawing your RMD by 12/31 of the year you turn 72, and then by 12/31 of every year thereafter.

Q: Can I contribute to an IRA if I also contribute to a 401k or other company-sponsored retirement plan?

A: Yes, you can contribute to a traditional IRA, but before you do, let’s make sure the deduction is going to be tax-deductible. Your contribution will not be deductible if you are an “active participant” in a company-sponsored retirement plan and you earn above the following thresholds:

IRA AGI Limits If contributor is a participant in a company-sponsored retirement plan, deduction is phased out between:
2020 2021
Single $65,000 – $75,000 $66,000 – $76,000
Joint (MFJ) $104,000 – $124,000 $105,000 – $125,000
Contribution for non-participating spouse $196,000 – $206,000 $198,000 – $208,000

NOTE: The answer above refers to contributions to a traditional IRA. A ROTH IRA works differently. The only factor  that determines if you can contribute to a ROTH is your income. You can contribute to a ROTH, regardless of participation in a company retirement plan, if your income is below the following thresholds:

ROTH IRA AGI Limits Full Contribution is allowed if below this range of income or phased out in this range:  
2020 2021
Single $124,000 – $139,000 $125,000 – $140,000
Joint (MFJ) $196,000 – $206,000 $198,000 – $208,000
Married filing separately $0 – $10,000 $0 – $10,000

Q: Can I contribute to an IRA if I am over 72?

A:  YES, as long as your have “earned income”. This is true for IRAs and workplace retirement plans, such as 401ks.

Q: Do I need to take a Required Minimum Distribution from my ROTH IRA?

A:  No. There are no RMDs from a ROTH IRA during your lifetime or that of your spouse, assuming he or she is your sole primary beneficiary. Any beneficiary other than your spouse will be required to withdraw all funds from your Roth IRA within 10 calendar years after your death.  They will not be required to take withdrawals each year, so hopefully they can let the funds continue to grow tax-free for several more years before they withdraw them (the withdrawals will also be tax-free).

Q: How do I calculate my Required Minimum Distribution?

A:  The company that holds your IRA usually calculates it for you, although it is your responsibility.  The math is pretty simple:

Step 1 – Find out your IRA account balance as of the previous December 31.

Step 2 – Divide by the number from the Uniform Life Expectancy Table that corresponds with the age you will attain on your birthday in the current year. Note, RMDs begin in the year your turn 72.

Uniform Life Table

Let’s look at an example: Suppose your account balance last 12/31 was $250,000 and you are going to be 72 on your birthday this year. You can see from the table above that the divisor that corresponds with your age is 25.6.

Therefore, $250,000 ÷ 25.6 = $9,766.  You must withdraw this amount by 12/31 of this year.

One caveat to the above. You can use the Joint Life Expectancy table, which results in a smaller RMD, if your spouse is more than 10 years younger than you. There is also a different table, the Single Life Expectancy table for beneficiaries of an account (an inherited IRA).

Now that you understand the math, here is an RMD Calculator to make things simple on yourself.

Q: How much can I contribute to an IRA?

A:  $6,000 if you are under 50 and $7,000 if you are 50 or above. You must have at least as much earned income as the amount you contribute. For example, you could only contribute $3,000, if that was all you earned for the year.

Q: Is there a limit to how much I can earn and still contribute to an IRA?

A: There is no earnings limit for a traditional IRA. So, if you earn $1 million, you can still get your $6,000 or $7,000 deduction. The bad news is you are still going to pay a lot of taxes on the rest of your income. However, the deduction may be phased out if you are also contributing to a company retirement plan such as a 401k.

A ROTH IRA works differently. The only factor  that determines if you can contribute to a ROTH is your income. You can contribute to a ROTH, regardless of participation in a company retirement plan, if your income is below the following thresholds:

ROTH IRA AGI Limits Full Contribution is allowed if below this range of income or phased out in this range:  
2019 2020
Single $122,000 – $137,000 $124,000 – $139,000
Joint (MFJ) $193,000 – $203,000 $196,000 – $206,000
Married filing separately $0 – $10,000 $0 – $10,000

Q: Is there any way to avoid paying taxes on my Required Minimum Distributions?

A:  Not really. RMDs are always taxable. Although…

  • Your RMD may only be partially taxable if you made a combination of pre-tax and after-tax contributions to your IRA. I hate after-tax IRA contributions for the reasons so eloquently explained in #7 of this blog post: IRA Contribution FAQs.
  • You can donate your RMD directly to qualified charities, thereby eliminating the tax liability. You must be 70 1/2 to do this and the fund cannot be sent to you first.  They must be sent from your IRA custodian directly to the charity.

Q: What happens if I forget to take my Required Minimum Distribution?

A:  There is a tax of 50% on the amount you were supposed to withdraw…assuming the IRS catches it. Alternatively, you can try explaining to the IRS that it was an honest error and reasonable steps are being taken to make up for the shortfall. You must file Form 5329 with a letter of explanation to request a waiver of penalty. Here are the instructions for Form 5329. You will only be taxed at your regular income tax rate if the waiver is approved.

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