There’s a four-letter word -- well, an acronym, actually -- that describes the inevitability of taxes on your older clients’ retirement savings: RMDs.

“Although inevitable, annual required minimum distributions that begin when retirees hit the age of 70-1/2 also present some planning opportunities, giving you a way to add value to client relationships,” according to Holly Manton, a wealth management strategist at HD Vest Financial Services®.

First, it’s important to give clients approaching retirement a heads-up about RMDs and explain the basic rules. Here are some highlights:

· RMDs are determined each year based on the retiree’s age using a life expectancy-based IRS table in Appendix B of IRS Publication 590-B;

· They are calculated using the retirement account’s value as of Dec. 31 of the previous year;

· They apply to 401(k) accounts as well as non-Roth IRAs and SEP IRAs, but they are not required to be taken from the 401(k) accounts of employees as long as they continue to work (even if only part-time) unless the employee owns at least 5 percent of the business (this exception does not apply to IRAs);

· They are not required of Roth IRAs since Roth distributions aren’t subject to income tax in general; and,

· They never force the complete depletion of an IRA or 401(k), regardless of the retiree’s age. Beginning at age 90, retirees are only required to receive an annual distribution of approximately 9 percent of the residual account value.


Age gap advantage?


The first year’s required distribution based only on the IRA owner’s life at 70-1/2 is approximately 6 percent. But Manton pointed out that,”Different formulas apply to taxpayers whose spouses are the sole beneficiary and are more than 10 years younger than the IRA owner.”

For example, a 71-year-old with a 59-year-old spouse would only need to receive a minimum distribution of about 3.6 percent of the account value. The principle is to avoid forcing the older spouse to nearly drain the account by the time they die, leaving little for the surviving spouse to live on.

Another important wrinkle in the RMD rules, Manton explained, pertains to retirees with multiple IRAs and a single 401(k) account. Suppose, for example, the RMD is 6 percent, and the retiree has a $500,000 balance in his or her 401(k), $100,000 in IRA No. 1 and $400,000 in IRA No. 2. The taxpayer would have to take 6 percent from the 401(k) account (i.e. $30,000), and also a total of $30,000 (6 percent) from the two IRAs. It would not matter, however, whether the $30,000 from the IRAs came entirely from IRA 1 or IRA 2, or any combination, so long as the total was $30,000. “This can be helpful if one of the IRAs is dominated by assets that are ripe for liquidation,” said Manton.

Planning opportunities

When clients aren’t going to depend on the income stream from their IRAs, it’s possible to plan ahead for what to do with those taxable RMDs -- even if the tax liability can’t be avoided. For example, they can be used to fund 529 college savings accounts for grandchildren, or to pay premiums for a life insurance policy whose death benefit would go to heirs, among other purposes.

Another potential opportunity is a Roth conversion. That, of course, will trigger a big immediate tax bite, but could ultimately steer tax-free income to heirs. That’s possible since the new Roth account wouldn’t be subject to RMDs, and thus the account balance could grow, leaving more to heirs than would be possible with an IRA subject to RMDs.

When clients die and their heirs inherit their IRAs (Roth or conventional), the heirs don’t get to defer receiving distributions until they reach that magic age of 70-1/2. Instead, they must begin taking distributions immediately, no matter how young they are, based on their life expectancy at that time.

What happens if the retiree fails to take the RMD? “You don’t want that to happen,” said Manton. “The penalty is 50 percent of the required distribution amount.”


For more information about HD Vest Financial Services and how they can help you transfer a client’s wealth, visit hdvest.com/join or contact a Business Development Consultant at (800) 742-7950. HD Vest Financial Services® and its affiliates (collectively, “H.D. Vest, Inc.”) do not provide tax or accounting services. You should consult your tax professional regarding the tax implications of any investments. The views and opinions presented in this article are those of Holly Manton and not of HD Vest Financial Services® or its subsidiaries. Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name.

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