FIN
Module 5 -2.docx

# The benefit of not mandating rmd is that roth ira

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The benefit of not mandating RMD is that Roth IRA balances can continue to compound tax-free for longer periods of time. This potentially creates a larger estate than would otherwise have existed. There is a special rule that applies to qualified plans. The required beginning date can be postponed until the April 1st following retirement if the participant remains working past age 70 ½ and also assuming that the assets remain in the qualified plan until distributions begin. This special rule is only available to those who are NOT 5% owners in the employer. The RMD calculation uses the ending balance from the previous December 31 st . It does not use a balance from the middle of the year, because that would be a constantly moving target, and the RMD amount would, therefore, change daily…it does not. To find the RMD value, you locate the taxpayer’s age on a government table and find the government-assumed distribution period. Let’s consider someone who turns 70 on September 14 th in 2017. Her IRA account balance was \$200,000 on 12/31/2017. Using the government tables (Table III), we find that her distribution period is 26.5 for an RMD amount of \$7,547 (\$200,000/26.5). Note that for RMD calculations, you always use the previous 12/31/XX balance and never the current market balance . This is because the 12/31/XX balance stays the same after 12/31/XX and the current market balance is always changing.

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The required calculations take into account if someone has a spouse that is at least 10 years younger than they are. In this case, you use Table II. If the person in our previous example were to have a spouse who is 60, then their RMD would instead be \$7,352.94 (\$200,000 / 27.2). Beneficiaries use Table I, which you will encounter on the special project for this lesson. Q: Is it true that a client must begin taking required minimum distributions by the time they reach age 59½? A: No, this is the age when the 72(t) penalty will no longer apply. The required beginning date for RMD is 70½.
Q: Shelly has an IRA with \$375,000. She just celebrated her 70th birthday on March 15, 2018. When is her required beginning date? What is her first year of distribution? What age is used in the tables to find her divisor? A: Shelly's 70 1/2 birthday would be September 15, 2018. This means that she must take a distribution in 2018, but she could delay until April 2019 and follow the double dip rule. She will use age 70 in the tables because she is 70 in the year in which she hits her RBD. Q: A client reached their required beginning date on April 24, 2018. They elected to apply to April 1st rule. From the perspective of tax-deferred plan distributions, what does their tax situation look like in 2018 and in 2019? A: In 2018, they will not have any tax impact from retirement plan distributions. Because they applied the April 1st rule, they will be taking their 2018 distribution as taxable income in 2019 and they will also be taking their 2019 RMD as taxable income in 2019. They will double-dip on taxable income in their first year of the RMD cycle because they chose to apply the April 1st rule.

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• Spring '14
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