Nov 17, 2017 3 min read

Everyone should be thinking about end of the year tax planning. If you are over 70-½ you must take required minimum distributions from all qualified accounts. A qualified account is something such as an IRA, 401(k), 403(b), deferred compensation or any other account where you received a tax deduction for putting earned income into the account.

Uncle Sam gave you a tax break when you deposited the money by allowing you to subtract this total from your paycheck. At 70- ½, he wants to begin recouping these taxes. You do not want to miss this if you are required to do so by your age. The penalty is 50 percent plus the tax on the full amount. For example, if you are in the 25 percent tax bracket and miss a $10,000 required minimum distribution, you would owe $5,000 plus $2,500 or $7,500. That is 75 percent in taxes.

There are several facts to remember. This deduction must be completed by December 31. Do not wait until the last minute. Many companies are running on skeleton crews during the holiday, so processing might be slower than normal. If this is completed late, you are responsible – not your custodian. A married couple must both make deductions from their own accounts if both are over 70-½. You can deduct more, just not less than required minimum distributions. Any distributions taken during the calendar year count toward your total. The value of your accounts on Dec. 31 of the prior year determines the account balance. The IRS provides a table to calculate the correct percentage required. It increases each year as you age. Finally, there is no prorating for what month your birthday falls in. If you reach 70-½ during the year, you must deduct full amount. You turn 70-½ six months after your 70th birthday.

If you have money in your qualified accounts that you will need to spend during your lifetime, you may be able to bump the bracket. Bumping the bracket is a way to “detoxify” money in your qualified accounts. If you can determine that based on your sources of income, you will never be below the 25 percent tax bracket and are file jointly; here is how it might work. Say your income is $90,000. You might withdraw and pay taxes on an extra $60,000 from your IRA. If you are never going to be below 25 percent, your tax rate will never be lower under current tax law.

Bumping the bracket is a way to try to keep future tax as low as possible. If you are going to do this, it must be completed before Dec. 31. Remember, this is only if you will need to spend this money during your retirement. If you won’t need the money and will be passing it on, do not bump the bracket. If you are leaving the money to a church or charity, withdraw only the required minimum distribution. Charities do not have to pay taxes on this money so they will receive more. If you are leaving money to your children or others, consider using a stretch IRA to increase the final benefit to your beneficiary.

No one knows how tax laws may change for 2018. Be proactive with your tax planning, not reactive. Consult a tax professional early enough to discover your options.