How to Delay and/or Avoid Required Minimum Distributions
While the SECURE Act raised the commencement age from age 70½ to 72 for required minimum distributions (RMDs), there are actually a number of other ways that retirement plan participants can delay and/or avoid minimum distribution requirements if they plan ahead.
- Consolidate pre-tax retirement plan account balances — Participants can delay distributions from the retirement plan of their current employer (but not traditional IRAs or prior employer retirement plans) until April 1st following the later of the calendar year in which they turn 72 or the year in which they retire (unless they are a 5%+ owner of the company, in which case they must commence RMDs at age 72, regardless of employment status). Thus, participants planning to work past the age of 72, and looking to delay RMDs on all of their retirement plan accounts, should roll over pre-tax IRAs and prior employer retirement plan accounts into the current employer’s retirement plan. This should be completed prior to the calendar year in which they turn 72; otherwise, any RMDs due on prior accounts would not be eligible for rollover. And of course, if a participant switches employers, the balances should continue to be rolled over to the new employer to take advantage of the current employer rule (note: if a participant changes employers in the year in which they turn 72, they will be on the hook for that year’s RMD).
- Consolidate Roth retirement balances — Strangely, this works in nearly the opposite fashion of pre-tax balances. Here, the vehicle of consolidation will generally be an IRA, and NOT the current employer’s retirement plan. This is due to a strange quirk in the law that requires minimum distributions from Roth 401(k), 403(b) and 457(b) accounts, even though these accounts are distributed tax-free at retirement (I know, that makes absolutely no sense, but that is the law). The same rules as stated above (later of age 72 or retirement) apply. Roth IRAs, however, have no such RMD requirement. Thus, it generally makes sense to roll all Roth assets to a Roth IRA prior to the calendar year in which a participant turns age 72, if they wish to avoid the RMD requirements entirely.
- Contribute a traditional RIA RMD to a charity — Another difference between IRAs and retirement plans with regard to RMDs is that an RMD of up to $100,000 from a traditional (tax-deductible) IRA can be contributed directly to a charity tax-free, while retirement plan RMDs have no such feature. Thus, another way to avoid a taxable RMD would be to roll over all retirement plan assets to an IRA (or IRAs) prior to the year in which a participant turns age 72, and then contribute the IRA RMD to a charity. Participants can also take advantage of this rule on, or after, the calendar year in which they turn 72, but keep in mind that any RMDs for the year the transaction is completed cannot be rolled over, so participants must take the RMDs due from any retirement plans that year - and they will be taxable. Only the remaining balance after RMDs can be rolled over to an IRA.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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