John R. Bullis: IRA required minimum distributions

IRA and other retirement accounts are valuable. However, once age 70 1/2 is reached, there are required minimum distributions that are to be paid to avoid a penalty for not doing so.

The penalty for a missed required minimum distribution (RMD) is 50 percent of the amount that should have been taken. However, there are ways to avoid the penalty. The income tax return can explain the RMD was not taken because of illness, or other reasons. Then the RMD that should have been taken, say in 2015, it can be paid in 2016 and the penalty can be avoided. Of course, the 2016 RMD also will be paid so the total income in 2016 will include two RMDs.

It is helpful to have separate files for each IRA and for each other retirement accounts. While a file folder can be used, many folks find using a three ring binder is better. Some use different colored binders for each account.

The computation of the RMD is fairly straight forward. Take the balance at Dec. 31 of the prior year and divide it by the “life expectancy” listed in the IRS tables. I don’t know why Congress or IRS doesn’t just convert it to a percentage that would be easier to understand and use. The first required distribution in the year of achieving age 70 1/2 turns out to be just a little less than 4 percent.

There is a special choice of taking the first distribution by April 1 of the following year. We generally find this is not worth doing. It just adds extra amounts (prior year and current year RMDs) into the taxable income of the second year. Since the taxation of Social Security benefits depends on total income, taking the two RMDs in one year may result in more taxable Social Security benefits.

There is another choice available. Instead of receiving the RMD and using some or all of that money to do charitable contributions, you could have part of all of the RMD paid directly to the charity. Like all tax rules, there are limits and special rules. The RMD is paid directly to the charity. That will satisfy the requirement of taking the RMD, but you do not have taxable income on your tax return. You do not get to claim a charitable contribution for that transaction, but we find many folks that are not claiming itemized deductions anyway. You must be age 70 1/2 to do this and it can not be for more than $100,000. This may reduce your taxable income which might further reduce the amount of Social Security benefits that are added into taxable income.

That RMD paid directly to a charity requires the charity to be a 501(c)(3) charity and is not allowed for transfers to a supporting organization of the charity or a donor advised fund.

Did you hear? “Life is giving. Life is receiving. In short, life is being connected,” by Tijn Touber.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.