Stock market indices were up again last week, with the S&P 500 reaching another all-time high. The jobs report released the previous week showed strong employment gains. China has continued trade negotiations, and the market reflects expectations of a new trade deal that will be more favorable to the United States.
As we approach the end of the year, it is important to check any qualified accounts to see if you need to take a Required Minimum Distribution, or RMD. What’s a qualified account? In financial services, we refer to accounts that qualify for special tax treatment as “qualified.” Ordinary investment accounts are considered “non-qualified”, meaning there is no special tax treatment. Examples of qualified accounts include IRAs, 401(k)s, 403(b)s, and the government’s Thrift Savings Plan.
With traditional retirement accounts (that is, non-Roth accounts), the IRS defers taxing the account until you take money out. Because the government wants its tax dollars, you are required to start taking money once you reach 70 ½. The first distribution has to take place by March 15th of the year after you turn 70 ½. If you have inherited any retirement account, including a Roth, you have to take an RMD each year as well. Your RMD is calculated with the help of an IRS table. You look at how old you are, and it tells you how much (what percentage) you need to take out. You multiply that percentage by the balance in the account as of December 31st to get your RMD for the next year.
If you don’t take the RMD, you will be taxed as if you had, plus a 50% penalty. So not taking a $2000 RMD means you are taxed on the $2000, plus a $1000 penalty. Good reason to make sure you’re taking your RMDs every year.
If you have multiple retirement accounts, you need to take one distribution per type of account. For example, if you have 3 IRAs, you can take the total amount of your RMD from just one account. But, if you have an IRA, a 401(k) and a 457, you need to take an RMD from each account. That may be a reason to consider consolidating accounts in retirement.
If you’re worried about the impact these RMDs is having on your income, meaning more of your social security is taxed, and your Medicare premiums are means-tested, tune in next week to learn about Qualified Charitable Distributions.
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.