As an elder law attorney, I help clients address a number of concerns, including estate planning wills, special needs planning, and even help with Medicaid applications for residents throughout Chester County. And one of the most common questions my clients ask is about planning and protecting their assets, namely their IRAs, 401(k)s, and other retirement funds.

Understanding and safeguarding your funds are crucial to planning for your retirement and beyond. But these matters can be multifaceted, nuanced, and just plain complicated. For many people now, and for most people going forward who save for retirement, their employer-based tax-deferred retirement plans will be their largest asset. This includes 401(k), 403b, IRA, SEP, and others. For the purposes of this article, I will refer to IRAs as simply a catchall term, since the withdrawals from these accounts are all treated similarly and most people roll over employer-based plans into IRAs when they retire.

In most cases, the funds contributed to these accounts were pre-tax money, and as a result, the withdrawals will be taxable income. While some accounts allow contributions of after-tax funds, they are rare. If you contribute funds to your retirement plan above the tax-free limit, it will be very complex to allocate the withdrawals between taxable and non-taxable income.

For example, when you invest in an IRA, 401(k), or most other tax-deferred plans, you need to begin withdrawing money and pay taxes on what you take out after you turn age 70½. If you do not take the required minimum distribution by the deadline each year, you will pay a sanction — totaling 50% of the amount you need to withdraw.

What Are Required Minimum Withdrawals?

Required Minimum Withdrawals (RMDs) are predicated on the balance of your accounts as of December 31st the previous year, divided by a life expectancy metric based on your age as determined by the IRA. Your IRA or 401(k) manager can usually help with the calculations.

You have to take your annual RMD by December 31st. You must evaluate the RMD from each of your traditional IRAs (not Roths), including rollover IRAs and any SEP or SIMPLE IRAs. As long as you take the necessary amount considering all of your IRAs you can choose to take that amount out of any or all of the IRAs you own.

However, if you take it out of one account, it may change your overall investment mix and make you top heavy in certain investments. Regardless if you’re married and file a joint tax return, IRAs are owned individually. This means you and your spouse have to take your RMDs from your own accounts.

Some IRA or 401(k) administrators will automatically remove RMDs proportionately from each of your investments, unless you indicate otherwise, and they could end up selling stocks or funds at a loss to make your payment. To prevent that from happening, you can typically elect to take a fixed portion from each one of your investments or have 100% taken from cash.

If you choose cash, the IRA custodian or administrator may send you an advance alert in case you need to sell shares to assemble the cash. Many IRA administrators will allow you to automate the process so you meet your RMD requirement.

Since you do not have to take RMDs from a Roth IRA, if the numbers work out (paying the tax now to get the tax free growth and withdrawals) converting tax-deferred money to Roth IRAs can be a good decision.

Postponing Your RMD

If you’re still working at 70 and a half years of age, you could postpone taking your RMD from your present employer’s 401(k) until April 1st of the year after you retire (unless you own more than 5% of the company). However, you’ll still have to take RMDs from traditional IRAs and former employers’ 401(k)s. If your current employer permits it, you may be able to roll funds from other 401(k)s into your existing plan and avoid taking RMDs on that money while you’re still working.

If you are charitably inclined, once you turn 70½, you can transfer up to $100,000 from your IRA to charity each year. Considering the income tax implications, transferring IRA money is a tax-smart move compared to transferring cash. While you can make the transfer to one or more tax-qualified charities, you can’t make it to a donor-advised fund. To qualify as a QCD, the transfer must be made directly from your IRA to the charity — you can’t withdraw the money first. You can ask your IRA administrator about this process.

Qualified Longevity Annuities

The money you invest in a deferred-income annuity is known as a qualified longevity annuity contract, and it’s deleted from your RMD calculation. You can put up to $130,000 from your IRA in a QLAC (or up to 25% of the total in all of your traditional IRAs, whichever is less) at any age — most people do this in their fifties or sixties. You can pick the age when you’d like to start receiving the annual lifetime income, generally in your seventies or eighties, but no later than the age of 85.

For instance, a 60-year-old individual who invests $130,000 in a QLAC could receive about $37,000 per year starting at age 80. That eliminates $130,000 from forthcoming RMD calculations, and they won’t have to pay taxes on that money until they start to receive the $37,000 annual payouts at age 80. If they pass away before that age, the individual won’t receive anything. They could get a variant with smaller payouts that will give their inheritors the difference if they die before their payouts equal the original investment; however, if the money is in a QLAC, you cannot use it now.

No matter what your financial situation is, it’s critical to have an attorney on your side who can help you navigate the complexities of using your assets to appropriately plan for you and your family’s futures. And from estate planning to financial management and assistance with Medicaid applications in Montgomery County, Slutsky Elder Law can help guide you through these processes to give you the confidence and peace of mind that only an experienced elder law attorney can.

For more information about required withdrawal minimums or planning for your future, call us today at (610) 940-0650.

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