Understanding IRA Minimum Distribution Requirements

Many people who have been contributing to Individual Retirement Accounts (IRAs) for years have watched their account balances grow through tax-deferred accumulation. However, did you know the Tax Code mandates that contributions to traditional IRAs are no longer permitted after reaching age 70½ and required minimum distributions (RMDs) must commence no later than April 1 of the year after the year in which you reach age 70½?

Let’s take a look at the following example. Suppose Bob’s 70th birthday was July 15, 2017 and he attained age 70½ on January 15, 2018. Bob will have until April 1, 2019 (the year after reaching age 70½) to begin taking distributions.

It is important to note: The first RMD is actually for the year in which you attain age 70½; however, you are allowed to postpone it until April 1 of the following year. For every year after the first distribution, the RMD must be taken by December 31.

At first glance, postponing the first RMD may seem like a good idea because you can gain additional tax deferral. However, a second RMD would be due by December 31 of the same year (i.e., that year’s required distribution). Not only would this substantially increase your taxable income, but it could also limit some deductions based on adjusted gross income (AGI) and possibly subject your Social Security benefits to taxation.

Consequently, some people find that it makes sense to take the first RMD in the year when age 70½ is reached, rather than to postpone and “double up” the following year.     

Calculating the Distribution

Each year, the RMD amount is be calculated by dividing the IRA balance, as of December 31 of the previous year, by the applicable life expectancy factor from the appropriate IRS table. If an individual has more than one IRA account, the RMD amount must be calculated according to the total balance in all accounts. However, the amount can be taken out of any one (or more) IRA account. For each subsequent year, the RMD amount must be recalculated.

It is important to note: If you fail to withdraw the RMD amount for each year, you may be subject to a penalty tax. This tax is 50% of the difference between the amount actually withdrawn and the amount required to be withdrawn (i.e., the minimum distribution shortfall).

IRAs continue to be valuable vehicles for retirement planning. However, the time of reckoning (i.e., mandatory withdrawals) may be approaching for many IRA owners. Knowledge of the rules may help avoid potential tax problems. Be sure to consult a qualified tax professional for advice specific to your unique circumstances. 

Introduction to Tax Strategy


Introduction to Tax Strategy

Nobody likes to pay more taxes than necessary. As you know, tax laws change often and next year may contain some of the largest changes to tax law in a long time. Therefore, lowering your tax bill involves careful planning. In fact, there’s hardly an aspect of your financial situation—savings, education, real estate, investments, retirement funding, and estate planning—that isn’t influenced by changing tax law.

In recent years, historic tax reform has provided significant savings for individuals, families, and investors. However, many of these opportunities are temporary, and unfortunately in a 2015 study by the National Consumer Law Center, after mystery shopping tax preparers, over 93% of tax returns prepared by paid preparers had errors.

We want to help you get what’s rightly yours.

This information has been developed to help you make the most of current, temporary tax breaks. In addition, we offer time-tested tips that cover every aspect of your financial situation in the short- and long-term. Our goal is to help you minimize your tax liabilities and maximize your potential savings.

Life Changes

Have your circumstances changed in the last year? If so, you may be a good candidate for tax planning. As you begin preparing your taxes, take a stroll down the front of Form 1040, and think about the life changes you have experienced in the past tax year.

Have you married or divorced in the past year? Near the top of the form you must declare your filing status (single, married filing jointly, married filing separately, or head of household), which determines your marginal tax rate (the rate at which your last dollar of income is taxed).

Have you had a child, adopted a child, or assumed caregiving responsibilities? If so, the number of exemptions you claim, or dependents you support, may change.

Have you changed jobs, started a home business, or rented out your second home? There are more than a dozen types of income that you must report, as applicable to your situation.

Have you made payments on a mortgage, incurred medical expenses, or donated to charity? At the bottom of the form, you will list any deductions, which in turn reduce your total income to adjusted gross income (AGI).

As you can see, life changes are relevant to planning your tax strategies.

The Importance of Timing

Waiting until just before April 15 to start thinking about your taxes may prove to be a costly mistake. Like your financial strategy, your tax strategy operates in two time frames—now and later. “Now” covers the 12 months of the current tax year.

The specifics of your income and the deductions available to you will certainly change from year to year according to your changing circumstances, and you may be able to save money now by making small changes.

“Later” covers long-range tax strategies that benefit your future, such as maximizing the tax-deferred savings offered by a qualified retirement plan like a 401(k). Either way, timing is critical, and your planning can make a significant difference.

By coordinating your tax strategies with your life changes and financial strategies, you may accomplish a variety of goals, such as buying a home, funding a child’s education, and funding your retirement.

One of the services we offer should you decide to work with us is a tax planning strategy to help you keep more of your hard-earned money.

If you would like to find out if you’re a good candidate for tax planning, book your free call with us today at www.kisplanning.com/apply. During our chat, we will not only help you get clarity on whether you’re a good candidate for tax planning, but also whether there are any other areas of your retirement planning situation that we can help you identify for improvements.

We are here to help. Book your call today: www.kisplanning.com/apply




Keep It Simple Financial Planning is a fee-only fiduciary registered investment advisor located in the heart of Orange County, Santa Ana, CA. We help clients that are concerned about running out of money in retirement create a plan to retire with confidence. 


Happy Birthday to the Roth IRA.

Yesterday was my birthday but it was also another important day in history. The birthday of the Roth IRA. Roth accounts were born 20 years ago and are one of the best tools in financial planning if used properly.  Some of the benefits are obvious but others are not. You may know that Roth money is contributed after tax and grows tax free forever. But did you know that Roth accounts don’t have required minimum distributions like their traditional counterparts do?

Another huge benefit is that when you take distributions they are not counted as earned income which means your tax bill is not impacted. This can be huge in retirement especially when considering working part time while drawing Social Security.

What if you have all your money in traditional accounts? Can you get it into Roth accounts without paying taxes and take advantage of these benefits? There’s a good chance you can with a technique called “Roth conversions.” Roth conversions are when you money from traditional IRA accounts to Roth IRAs leveraging your lower tax brackets in lower earning years. The power of this process can be mind boggling if done right. Not only to protect your money now from taxes and required minimum distributions but also in the future for money you may want to leave heirs.

If you want to learn how using Roth conversions as a retirement planning tool can benefit you, schedule a strategy session with us to chat about it. It’s free and may be the best 45 minutes you ever spent working on your retirement. Go to www.kisplanning.com/apply to get started. Have a great holiday and let me know if you have further questions. -Jason