You may need to add RMDs to your year-end to-do list

RMDs

As the end of the year approaches, most of us have a lot of things on our to-do lists, from gift shopping to donating to our favorite charities to making New Year’s Eve plans. For taxpayers “of a certain age” with a tax-advantaged retirement account, as well as younger taxpayers who’ve inherited such an account, there may be one more thing that’s critical to check off the to-do list before year end: Take required minimum distributions (RMDs).

A huge penalty

After you reach age 70½, you generally must take annual RMDs from your:

  • IRAs (except Roth IRAs), and
  • Defined contribution plans, such as 401(k) plans (unless you’re still an employee and not a 5%-or-greater shareholder of the employer sponsoring the plan).

An RMD deferral is available in the initial year, but then you’ll have to take two RMDs the next year. The RMD rule can be avoided for Roth 401(k) accounts by rolling the balance into a Roth IRA.

For taxpayers who inherit a retirement plan, the RMD rules generally apply to defined-contribution plans and both traditional and Roth IRAs. (Special rules apply when the account is inherited from a spouse.)

RMDs usually must be taken by December 31. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.

Should you withdraw more than the RMD?

Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.

Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.

Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Three Midyear Tax Planning Strategies for Individuals

Tax Saving Strategies

In the quest to reduce your tax bill, year end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here are three strategies that can be more effective if you begin executing them midyear:

1. Consider your bracket

The top income tax rate is 39.6% for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold, consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6% bracket or you can’t avoid the bracket.)

You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017).

2. Look at investment income

This year, the capital gains rate for taxpayers in the top bracket is 20%. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8% net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

3. Plan for medical expenses

The threshold for deducting medical expenses is 10% of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.)

Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.

These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult us now. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.