couple walking on beach with sunset

Required minimum distributions – what you should know

It’s important to understand, prepare for, and comply with RMD requirements, especially from a tax and financial perspective.

The money you’ve accumulated in retirement savings plans won’t be tax-deferred forever. Required minimum distribution (RMD) rules apply to your individual retirement arrangement (IRA), 401(k), or other qualified retirement plans. A qualified retirement plan is an employer-sponsored plan that meets the requirements established by the Internal Revenue Code (IRC). It is important to familiarize yourself with these requirements to learn how they apply to your situation – especially from a tax and financial perspective.

tile-azl-man-sitting-on-boat

RMD rules

When the owner of an IRA or the participant in a qualified retirement plan reaches RMD age, traditional IRAs and qualified retirement plans (like 401(k)s) require the owner or plan participant to begin taking annual distributions of a minimum amount from their IRA or retirement plan.

Special rules apply to someone who is still employed and who participates in a qualified retirement plan with their employer.

Timing, calculations, and responsibility

You can generally delay your first RMD payment until April 1 of the year following the year in which you turn RMD age. For all subsequent years, your RMD is due by December 31 of the year. Technically, if you delay your first RMD between January and April 1 of the year following the year you turn RMD age or retire, you would be taking two RMDs in the second year.

If you don’t need your RMD, consider these options:

If you don’t rely on the RMD amount for your day-to-day living expenses, it’s helpful to know the possible places to contribute that amount – so you can make an informed decision regarding the RMD cash that can no longer remain in, nor be deposited in, an IRA, 401(k), or other qualified plan.

Roth IRA conversions

When planning for future income needs, you may want to consider converting some qualified funds into a Roth IRA.  No RMD is required while the Roth IRA owner is alive, but certain RMD rules do apply to Roth IRA beneficiaries. A conversion may be appropriate if you have more money in your retirement plan than needed and your income tax bracket is projected to be the same or higher at the time RMDs are required. There are both advantages and disadvantages, and it’s important to see your tax advisor for your own situation.

tile-azl-man-holding-surfboard

Qualified charitable distributions

Traditional IRA owners, and traditional and Roth IRA beneficiaries, who are at least age RMD age, can make a nontaxable qualified charitable distribution (QCD) of up to $100,000 annually from their IRA and not pay income taxes on that distribution. If the distribution meets the QCD requirements, it counts toward the individual’s RMD for that year. Note that if the distribution from a Roth IRA would be a qualified distribution; there is no need to make a QCD for tax purposes. To qualify as a QCD, many requirements must be met. Consult your tax advisor or local attorney for details.

houses on sand

Nonqualified annuities

It may be advantageous to contribute RMDs into a nonqualified tax-deferred annuity to obtain tax deferral, similar to the IRA (the RMD of course is taxable, but then can be used as an after-tax purchase payment). A nonqualified annuity is an insurance company’s product; you pay the insurance company premium or purchase payments – and in exchange you get benefits only an annuity could provide. Plus, annuities pay a death benefit if you pass away before you start taking income, and in many cases, the death benefit is not subject to probate. However, keep in mind that nonqualified annuities may have disadvantages such as fees and surrender charges.

tile-azl-woman-holding-surfboard

Plan ahead:

It’s wise to plan ahead and prepare for RMDs to avoid any last-minute mistakes at year-end. If you miss the December 31 deadline or fail to withdraw the proper amount, you may have to pay an excise tax to the IRS – up to 50% of the amount you didn’t take out.
1
Determine your personal RMD deadline for qualified plans and IRAs. If married, your spouse should also determine their deadline(s). Be sure to include IRAs, Roth IRAs, and qualified plans that you and/or your spouse inherited.
2
Estimate the RMD amounts and whether you will use them for retirement income or set them aside for future savings or legacy plans.
3
Consider various financial strategies and products for those RMDs you do not need for retirement income such as gifting, savings, funding nonqualified annuities, or other investing.
 
4
Meet with a financial professional and tax advisor who have knowledge of the RMD rules and additional possibilities for your RMDs.

Please remember that converting an employer plan account to a Roth IRA is a taxable event.

Increased taxable income from the Roth IRA conversion may have several consequences including (but not limited to) a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.

This content is for general educational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Company of North America, its affiliates, and their employees and representatives do not give legal or tax advice. Customers are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations.

Any distributions are subject to ordinary income tax and, if taken prior to age 59½, a 10% federal additional tax.

Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.

All annuity contract and rider guarantees, or annuity payout rates, are backed by the claims-paying ability of the issuing insurance company. They are not backed by the broker/dealer, registered investment adviser, or field marketing organization from which this annuity is purchased, by the insurance agency from which this annuity is purchased, or any affiliates of those entities, and none makes any representations or guarantees regarding the claims-paying ability of Allianz Life Insurance Company of North America. For variable annuities, guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.

Guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.

• Not FDIC insured • May lose value • No bank or credit union guarantee • Not a deposit • Not insured by any federal government agency or NCUA/NCUSIF

Products are issued by Allianz Life Insurance Company of North America. Registered index-linked annuities are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297.

In the state of New York, only Allianz Life Insurance Company of New York is authorized to offer annuities and life insurance. www.allianzlife.com/new-york