Last-Minute Strategies for RMDs From Your Retirement Accounts

(Editor's note: The tax law was extended on December 17, permitting tax-free transfers from IRAs to charity for 2014.)

If you’re 70½ or older, you generally need to take required minimum distributions from your traditional IRAs and your 401(k), 403(b), 457 or Thrift Savings Plan by December 31. If you haven’t taken the required withdrawals for 2014 yet, you need to act quickly. If you miss the December 31 deadline, you’ll owe a penalty of 50% of the amount you should have withdrawn but didn’t. Here’s what you need to know about last-minute RMDs.

Calculator: What Is My IRA Required Minimum Distribution?

When do I need to take my RMD to make the deadline? It’s generally a good idea to take your required distributions by December 20 to have plenty of time to meet the deadline. Contact your retirement-plan administrators to find out how long it will take to process the transaction if you need to wait longer than that. Although you have until December 31 to meet the deadline, the administrator may need some more time, especially if you have to sell investments and wait for the trades to settle before you have enough cash in the account for the withdrawal. And keep in mind that the market will be closed on Christmas. (See below for advice about making a tax-free transfer from your IRA to charity.)

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Does everyone over age 70½ have to take required minimum distributions from their retirement plans? You can delay taking RMDs from your current employer’s retirement plan while you’re still working in that job. But you must still take RMDs from your traditional IRAs and your former employers’ retirement plans after you turn 70½, even if you’re still working. (Roth IRAs don’t have required distributions.)

If I just turned 70½ this year, do I have to take my first RMD by December 31? You get a grace period for your first RMD until April 1 of the year following the year you turn 70½. But you’ll also have to take your second required distribution by December 31 of that year, whether or not you took advantage of the grace period for the first withdrawal. Two RMDs in one year will bump up your income and could boost you into the next tax bracket. It may also make you subject to additional taxes on your Social Security benefits or the Medicare Part B and Part D high-income surcharge (see Figuring the Tax Bill on Social Security Benefits and How to Avoid the Medicare Surcharge for more information). Before you decide whether to delay your first required distribution, calculate whether you’re likely to pay less in taxes by taking that first distribution in 2014 rather than 2015.

How do I calculate my RMD? Your required distributions for 2014 are based on your account balance at the end of 2013 as well as your life expectancy per IRS tables. Your retirement plan administrator can generally help you calculate your required withdrawals, or you can use Table 3, the uniform lifetime table , in IRS Publication 590 (unless your sole beneficiary is a spouse who is more than 10 years younger than you). You can also use our What Is My IRA Required Minimum Distribution? calculator to help figure out your withdrawals.

If you have several IRAs, you must calculate your required withdrawals separately for each traditional IRA. But you can withdraw all the money from any of your traditional IRA accounts. However, if you have 401(k)s, 403(b)s, 457s or other employer-sponsored retirement accounts, you must calculate the required amount from each account and must withdraw the money from each account separately.

See Calculating Your Required Minimum Distributions for more information. Your 401(k) administrator may automatically calculate the required amount and send you the money if you haven’t taken the required withdrawal by a certain date, but you may want to take action yourself to choose which investments to tap to make the withdrawal. See Calculating Required Distributions From Your Retirement Accounts for details.

What can I do to reduce my RMD? There’s not much you can do now to reduce your RMD for 2014 (other than giving it to charity, if Congress approves it – see below). But you can make some moves to reduce your RMD in the future. The lower your account balance on December 31 of the year prior to your RMD, the smaller your required distribution. Converting some money from a traditional IRA to a Roth starting several years in advance can help you reduce the amount of money subject to RMDs. You may want to convert more money to a Roth in years when your income is lower. Converting the money from a traditional IRA to a Roth doesn’t reduce your RMD in the year you make the conversion, but the money grows tax-free (and RMD-free) in the account after that. See Consider a Roth IRA for Tax-Free Income for more information.

Can I give my RMD to charity? In years past, another way to reduce the tax bill on your RMD was to take advantage of a law that permitted people over age 70½ to make a tax-free transfer of up to $100,000 from their IRAs to charity. This law was just extended on December 17 to permit tax-free transfers from IRAs to charity for 2014.

Donating your RMD can be a good strategy if you were planning to contribute some money to charity anyway. The money you transfer counts as your required minimum distribution but doesn’t increase your adjusted gross income. You can’t make a tax-free transfer to charity and take a charitable deduction for the same money, but keeping the money out of your AGI could be more valuable if it helps you stay below the cut-offs for higher taxes. See Save on Taxes by Donating RMDs From Your Retirement Plan? for more information.