RMDs and how to pay the least tax on them
Turkey scraps, lights on the trees, and a long list of other items (p.Joe Zavisca, who was co-editor of The Sunday Column, withdrew due to growing tax practice on Income (see Joe’s website at joezavisca1040.com or email [email protected]) Rick Klee, Notre Dame’s retired tax director, steps in and joins Ken Milani. So it will be. ” Ken & Klee “which will provide information, ideas and commentary on a variety of income tax matters almost every Sunday through April 10, 2022.
Q: What’s the latest on the minimum required distributions (RMD) of qualified pension plans for 2021? Can you also make any suggestions for paying the least tax on RMD?
– ST, e-mail
A: RMDs must begin when a taxpayer turns 72 (or 70 1/2 for participants who have reached that age on or before 12/31/19 when the age limit has changed). . . UNLESS the person still works for the company where the plan is established. One of our colleagues has two 401k plans. The first is with a company that our colleague left many years ago. The second account is with the current employer. When calculating the RMD, the former employer 401k is the basis for the RMD. This brings up a planning strategy that goes against an emerging model (i.e. people who choose to retire early). Namely, continue with your current employer and delay the calculation and disbursement of the RMD until you retire.
A temporary waiver applied to RMD for 2020. Thus, a taxpayer with an IRA and / or a defined contribution plan such as a 401k or 403b did not have an RMD in 2020 and he avoided the penalty of 50 percent that occurs when an RMD is not taken. This dual benefit does not apply for 2021. When determining the 2021 RMD, the taxpayer begins with the account balance (s) on December 31, 2020 (aka, the numerator or the RMD base). The calculation continues using the information about the distribution period (i.e. denominator) provided by the Internal Revenue Service in publication 590-B available at www.irs.gov.
For example, if a 75-year-old single person’s account balance is $ 687,000, the RMD is $ 30,000 based on a distribution period of 22.9 years. One way to minimize taxes in 2021 would be to make a charitable contribution from the pension plan. If a qualified charitable distribution of $ 10,000 occurred in a timely manner, federal and state income taxes would decrease by approximately $ 2,900 (using federal and local tax rates of 24% and the 5% state ). The retiree would only need to withdraw $ 20,000 for personal use to meet the RMD parameter.
RMDs can be withdrawn from one or more accounts. Thus, the taxpayer may want to determine how much to contribute / distribute from each account. One tax planning strategy is to maximize your RMD from accounts that offer a below average rate of return. Such an action will reduce the RMD 2022 base and keep the funds in the best performing plan (s).
Rick Klee was Tax Director at the University of Notre Dame from 1998 to August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at [email protected]
Ken Milani is Professor of Accounting at Notre Dame where he was the Faculty Coordinator of the Notre Dame Tax Assistance Program. Contact him at [email protected] Send questions to either.