PFG Private Wealth Management
18572 N Dale Mabry Hwy
Lutz, FL 33548
“Don’t tell me what to do!” I’ve heard it said that confession is good for the soul but bad for the reputation. So here goes… I have control issues. No I’m not OCD about anything and actually I like to think of myself as pretty laid back, but I like to manage things on my own and take a little pride in it too.
I believe the statement above resonates in all of us. No one likes to be treated like a robot that receives orders and has no say so in life, yet it is interesting that we have a condition inside all tax deferred accounts (IRAs, 401Ks, etc.) called a Required Minimum Distribution (RMD).
If you’re not familiar with this, the tax law requires you to take out a small percentage of your money starting at age 70 ½ or pay a penalty. This percentage increases each year. You declare that money as income on your taxes and you’ll do it each year thereafter. When I first heard about this, it frustrated me because people were being forced to pay taxes all because the IRS wants its money. However, there is another side to this story.
You’ve heard the saying “there’s no such thing as a free lunch.” And the saying is true in this case too. When contributions to tax deferred accounts were made, a tax deduction was received. Therefore when money is taken out, taxes need to be paid. In the end, your beneficiary will be receiving this money and unless it’s a charity, taxes will be paid by the beneficiary. As a result, it is better to take money out sequentially, even if it’s forced, than to put a large tax burden on your children or beneficiary.
However, not all distributions will result in someone paying on April 15th. Below are some questions and strategies to consider so the required distributions are in your best interest.
• Do you need the money for retirement? If so, then be intentional about the distributions and where you take the money from (Ex. IRA vs Non-IRA). This can be worked into your financial plan by easily satisfying two objectives at the same time.
• Do you plan on reinvesting the money? The money does not have to be spent, it can be moved into another investment vehicle allowing for potential continual growth.
• Do you plan on passing the money to heirs? Consider converting IRA assets to a Roth IRA. The money converted does become taxable but once in a Roth an RMD is eliminated.
• Do you have a charitable mindset? Consider giving your RMD to a charity. This allows for the dollars to not be taxable to you at all because of your charitable contribution.
If you ever find yourself asking questions about this subject, give me a call. I’d love to help you think through the best strategies.
Investment advisory services offered through PFG Private Wealth Management, LLC, a Registered Investment Adviser registered in the State of Florida.