How to Account for Required Minimum Distributions in Your Pension

Retirement funds are meant to be used. If you have an IRA or other retirement plan account, you most likely will be subject to required minimum distributions, or RMDs. These distributions ensure that you actually use the funds you accumulate in your defined contribution pension or retirement plan. 

However, they can also make planning your estate more difficult. If you do not account for RMDs in your estate plan, you may leave behind a significantly different estate than anticipated. Below, we discuss when minimum distributions are required, how they are calculated, how they affect your estate, and how to account for them in your plan. 

What Are Required Minimum Distributions?

An RMD is a mandatory payout from an IRA or similar profit-sharing or defined contribution plan. These distributions must begin when you turn 72, if you were born before 1950 or 73 if you were born in 1950 or later. 

You may begin withdrawing from these accounts earlier, but it is not mandatory. Similarly, you may draw more than the minimum once you reach the required minimum distribution age of 72 or 73, but you may not withdraw less.

What is the minimum distribution for a retirement plan? That depends on the plan in question. The IRS provides the Uniform Lifetime Table to help account holders calculate the specific minimum distribution. How is a minimum pension distribution calculated? By comparing the balance in your account at the end of the year against this table. 

Account holders are not the only people who are impacted by RMDs. These plans can be inherited by other parties. If so, the beneficiaries of the account are also subject to RMDs. The IRS provides similar tables for beneficiaries and spouses of account holders.

How Required Minimum Distributions Affect Estate Plans

An RMD can affect your estate plan in several ways. At a minimum, they prevent you from treating the account like any other investment. Instead of continuing to accrue funds indefinitely, your IRA or similar account will start paying out once you reach the age of eligibility. This will increase your liquid assets and reduce the amount available to be passed on to your beneficiaries.

Additionally, your beneficiaries will be required to continue taking RMDs. If this is not accounted for, they may face unwanted tax penalties. As such, accounting for RMDs in your estate plan is crucial.

3 Strategies for Accounting for RMDs in Your Estate Plan

When planning your estate, your best resource is your attorney. They will guide you on the best tactics to achieve your goals if you are required to take RMDs. Strategies they may recommend include:

Consolidate IRAs

Every IRA comes with its own RMD. By consolidating your IRAs into one account, you do not reduce the overall funds you need to withdraw. However, you simplify the process of keeping track of the amount you must withdraw. 

Take In-Kind IRA Distributions

If you don’t want to sell assets in your IRA, you can take an in-kind distribution. This transfers investment assets like stocks from your IRA to a taxable investment account. You are not taxed on the transferred assets, but you will be taxed on the income they generate for you going forward. This allows you to maintain your acquired assets instead of being forced to sell them to achieve your RMD.

Consider Qualified Charitable Distributions

If you want to make charitable contributions, your RMD is an excellent way. You can use your RMD to make qualified charitable distributions (QCDs) and increase your after-tax income. The donated amount is not considered part of your gross income and does count against your RMD. This maximizes your giving power without impacting your gift and estate tax limits.

Account for RMDs With Expert Legal Counsel

Required minimum distributions can complicate your estate plan if not addressed correctly. The best way to ensure your RMDs are accounted for is by working with a skilled estate planning attorney like those at The Dayton Law Firm P.C. Our experienced lawyers are available to help you understand your retirement accounts, their effects on your plan, and the best ways to handle them. Get in touch today to learn more about how we can help you.