IRA Steps to Take Before Year-End


The end of the year is the time to tie up your financial loose ends. Here are three steps that investors should take before January 1 to take advantage of existing regulations to avoid penalties and to maximize income.

–Be sure to take your required minimum distribution (RMD) before year end. RMD’s are required at age 70 1/2 for owners of a traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b) or 457(b) accounts. If you don’t take the RMD, the IRS can penalize you 50 percent of the amount that you didn’t take out. So if you were required to take out $5,000 and you took out only $2,000, you could face a penalty of $1,500. If you are not sure how much you are required to take out, ask your IRA trustee what is the required 2018 RMD. Your trustee can also tell you the amount you have already withdrawn.

If you have more than one IRA with different trustees, you have to determine the total RMD, which is the sum of all RMDs from separate IRA accounts. You can make a withdrawal from one IRA account to satisfy all your RMD requirements. For example, assume that your RMD from one IRA with one trustee is $3,000, and your RMD from another IRA with a different trustee is $2,000, you would satisfy your IRS requirement if you withdrew $5,000 from one of your IRAs.

You can compute the RMD yourself. Determine the total balance of all your IRAs as of December 2017. Divide this amount by the distribution from the IRS Uniform Lifetime Table specified in IRS regulation 590-B. There is one exception. If your only beneficiary is more than 10 years younger than you, then you should use a different table as specified in IRS 590-B. If you have any questions regarding RMDs, refer to 590-B.

–If you plan on doing a Roth IRA conversion for 2018, you must do so by the year-end. Under current regulations, you are allowed to execute a Roth conversion regardless of how high your income is. You can convert from a traditional, SEP or SIMPLE IRA, or you can convert from a qualified retirement plan to a Roth IRA. The primary advantage of doing a conversion is that after doing so, any interest, dividends or capital gains are tax-free. However, the disadvantage is that whatever amount you convert, assuming it has not been taxed yet, is taxable in the year of the conversion. Converting in a year when your taxable income is low is preferable.

There are three ways to convert: If you receive a distribution from traditional IRA, you can roll it over to a Roth within 60 days of the distribution. You can also do a trustee-to-trustee rollover from the trustee of the traditional IRA to the trustee of the Roth IRA. If the trustee of the traditional IRA and the trustee of the Roth IRA are the same, you can also do a trustee to trustee rollover. IRS publication 590-A explains all your options.

–Give to charity using qualified charitable distributions (QCD). Because of the doubling of the amount of the standard deduction in the recent tax legislation, many individuals who itemized in prior years will no longer itemize for 2018. If you are 70 1/2 and subject to the RMD, and you plan to make qualified charitable contributions in 2018, then you should have your IRA custodian make a direct transfer of funds from your IRA to a qualified charity prior to December 31, 2018. Any contribution up to $100,000 will result in a tax saving to you because the contribution will count as part or all of the RMD. For example, if your marginal tax bracket is 28 percent, if you contribute $1,000 directly to a charity from your IRA, your taxes will be reduced by $280. This alternative produces tax savings to you only if you don’t itemize. See IRS publication 590-B for more information regarding filing your tax return.


(Article written by Elliot Raphaelson)