Planning Strategies for Required Minimum Distributions

Retirement assets cannot be protected from taxes indefinitely.  Individuals who turn age 70½ this year may need to begin taking required minimum distributions (RMDs), or face substantial tax consequences.

Depending on your plan’s provisions, participants who turn 70½ in 2017 need to begin taking RMDs no later than April 1, 2018, unless they are still working. However, participants who own 5% or more of the business cannot delay RMDs even if they remain employed.

Once an individual is required to begin taking RMDs, an RMD must be taken each subsequent year by December 31st of that year. Failure to take an RMD will result in a 50 percent excise tax on the amount not distributed, in addition to the ordinary income tax due on that amount.

 

Here’s an example:

  • John is a 5% owner who turned age 70½ in 2017.
  • Required minimum withdrawal is $8,000.
  • If he fails to withdraw this amount by April 1, 2018, he will be assessed an excise tax of $4,000 ($8,000 x 50%). This excise tax is in addition to any federal and state income taxes owed.

Strategies for Employees to Consider

Depending upon an individual’s unique situation, there are several issues to consider with regards to taking RMDs, including:

  • Date of Initial RMD:  Deferring the first withdrawal to April 1 of the year following the year in which an individual turns 70½ has the effect of pushing the tax liability into the next year.  
  • Example:

    Let’s say an individual turns 70½ in 2017. He or she can delay taking the initial RMD until April 1, 2018. However, because the RMD for 2017 will need to be taken by December 31, 2018, delaying the 2017 RMD to April 1, 2018, may result in pushing the individual into a higher marginal tax bracket, resulting in a higher tax bill than if the initial RMD had been taken in 2017.

  • Conversion to a Roth:  While taxes will be due upon the conversion of a traditional retirement account to a Roth, Roth accounts do not require annual minimum distributions, which provides for extended tax-advantaged growth and potential estate planning benefits to heirs.
  • Amount of Distribution:  Unless there is a financial need to take more than the minimum amount, individuals should consider keeping as much of their retirement assets as possible growing tax-deferred.

Best Practices for Plan Sponsors

To help employees meet these requirements, employers should identify all employees turning age 70½ in 2017.

Every October, PNC provides employers with a listing of participants who will reach age 70 ½ or older for approval. It is important that plan sponsors distinguish between anyone who is a 5% owner and other employees, as RMD requirements may differ.

Employers should remind employees that PNC can help individuals calculate the minimum amount they need to withdraw. Employees should be encouraged to discuss an appropriate withdrawal strategy with their personal tax advisor.

If you have questions, please contact your Account Manager.

Inside Vested Interest®

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The material presented in this newsletter is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy.

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