What is an RMD: Required Minimum Distribution?

Sometimes Uncle Sam can be a really nice guy.  He lets you save money in tax deferred accounts such as IRAs, 401(k)s and the like.  You get to watch that money grow over the years, accumulating in value, while not paying any taxes on the gain.  Uncle Sam just waits patiently on the sidelines not collecting taxes on the earnings.  However, Uncle Sam isn’t going to wait forever, and that is where the Required Minimum Distribution comes in.

What is a Required Minimum Distribution (RMD)?

What if you never had to tap into your IRA?  What if you had enough money from pensions and in taxable accounts so that you could just let your IRA sit, unused forever?  Well then, Uncle Sam would never get his tax money would he?  He has been a nice guy up to this point, but he has his limits, he wants to see some tax revenue, and he has decided that when you turn 70.5 is as late as he is willing to wait to start to see it.

When– Once you turn 70.5 you will be required to take money out of your IRA.  The fact is many people will have already been taking money out of their IRA, and probably paying taxes and the earnings, but if you have not, you must at 70.5.   For more details I will be writing a blog post entitled “When do I have to take my RMD?”

How much – It is the minimum amount that Uncle Sam says you must take out of your tax deferred accounts (IRAs, 401(k)s and the like) each year.  The figure is based on the value of your tax deferred accounts on the last day of the year and calculated based on your life expectancy.  For more details on I will be writing a blog post entitled “How much will the Required Minimum Distribution (RMD) be?”

Why – So Uncle Sam can finally get his hands on the tax revenue which has been deferred all these years.

IRA money is for your retirement income

You are investing money in your IRAs and 401(k)s for a reason, to use during your retirement years.  For many families, they will be taking enough money out of their account each year to cover their living expenses anyway, more than the amount that they need to take out for the Required Minimum Distribution.  Especially as we see fewer and fewer pensions.   However, it is good to know the details because the penalty for not taking your Required Minimum Distribution (RMD) is quite steep.  It is 50% of the RMD amount that should have been taken but was not.

Required Minimum Distribution (RMD) blog post series

Required Minimum Distributions generate many questions so I am creating a series of blog posts to address these questions:

Shredding Event: Wildwood, Missouri

Wildwood, Missouri will host their third annual shredding event on Saturday, October 6th at 8:00am to 1:00pm at the St. Louis Community College – Wildwood campus at 2645 Generations Drive 63040.

I have to shred multiple times a day, because of the type of work that I do, so I have a good shredder that sits to the right of my desk, within reach of my seat.   But I do understand why a city would have a big shredding event once a year, because from time to time I hear from clients that they have just cleaned out of their file cabinets so they need to shred a bunch of papers or they have let a lot of their shredding accumulate and now it is a large pile.  If this sounds like your situation, you might consider collecting your papers for the shred event in Wildwood in a couple of weeks.    

Wildwood shredding event

Help protect yourself from identity theft, by making sure that your sensitive information is shredded, not just thrown in the trash.  Here’s what you’ll want to know about the event:

  • It is open to residents and nonresidents of Wildwood.
  • It is free.
  • Big, heavy-duty shredders are used.
  • Shreddings will be recycled, not sent to landfills.

What can be shredded

  • Paper
  • Paper Clips
  • Folders
  • CDs
  • Rubber Bands
  • Pill Bottles (without pills)

What Cannot be shredded

  • Cardboard boxes
  • Hard-drives
  • Batteries
  • Vinyl binders
  • Medical Waste (medicine/needles/etc)

Stop by St. Louis Community College in Wildwood Saturday October 6th 8:00am to 1:00pm and bring your boxes of shredding!

Missouri A+ College Scholarship Program

What is the A+ program?

The Missouri Department of Higher Education has an offering called the A+ Scholarship Program.  If your High School participates in the program, a student can enroll, and by fulfilling certain requirements can earn reimbursement for tuition and general fees for a two year degree at a participating community college or vocational/technical school.

Sign up for the program even if you do not plan to go to community college!

Getting your two year degree and transferring the credits to a four year college is a terrific way to save money on college costs.  However, if that isn’t in your plans, and you are going to go straight to a four year college, and you are a Missouri student, you should still enroll in the A+ program.  Why?  Because there are many four year colleges that are offering scholarships to A+ qualified students, but your high school transcript must indicate that you are an A+ qualified student.  Also, in the summer after high school graduation and before college, some students use the A+ scholarship money take general studies courses, such as math or language arts, at the community college to get a jump start on college, and doing so in smaller more intimate classroom settings, for topics that may be more challenging for them.

What are the requirements to qualify while in High School?

According to the Missouri Department of Higher Education (MDHE) website:

  • Have a written agreement/enrollment form with your school.
  • Have a GPA of 2.5 on a 4.0 scale.
  • Have an attendance record of at least 95%.
  • Graduate with at least 50 hours of unpaid mentoring/tutoring of students, in our school district this is organized by the school.
  • Beginning with the class of 2015, have achieved a score of proficient or advanced on the Algebra I end of course exam.
  • Must apply for financial aid using the FAFSA form.
  • Attend an A+ school for 3 years prior to graduation; exceptions are made, see the MDHE website.
  • Maintain a good record of citizenship and avoid drugs and alcohol.
  • Be a US citizen, permanent resident, or lawfully present in the US.

What is and is not covered

The scholarship covers tuition and general fees but does not pay for books, supplies or lab fees.

It is quite a good deal and an opportunity for families to save thousands of dollars if they use it exactly as it was set up and go to a community college or technical/vocational school.  Or save hundreds if not thousands of dollars, depending on the type of scholarship you get, at the four year colleges that are offering A+ students money to skip the community college and come straight to them.

Michele Clark in the News: US News and World Report

I was interviewed by US News and World Report recently about 401(k)s.  My thoughts appeared in an article on their website this week entitled “10 Strategies to Maximize Your 401(k) Balance.”

When Emily Brandon from US News and World Report called me I shared with her an idea for making it easier to save more in your 401(k), and we talked a bit about the new fee disclosure rules in 401(k)s and what that means for employees.  We also talked about the importance of adjusting your investment portfolio as you get closer to retirement.

If you would like to read the results of our conversation, and how she interwove it with the conversation she had with two other advisors, you can read the article here: 10 Strategies to Maximize Your 401(k) Balance.

Annuity Planning Tax Traps

St Louis FPA meeting

This week I attended the St Louis Chapter of the Financial Planning Association meeting at which John Olsen, CLU, ChFC, AEP gave two presentations Tax Traps in Annuity Planning and Index Annuities: Looking Under the Hood.  John serves as an expert witness in the area of annuity contracts, and is an author of books and articles.  He co-authored a book, with Michel Kitces, MSFS, CFP©, CLU, CHFC, to which I often refer; The Annuity Advisor.  It has been a helpful resource because many new clients come to me with existing annuities, and every annuity contract is different.

Annuity ownership

One of the biggest take-aways that I gleaned from the session was to pay careful attention to the titling of the annuity, who owns it, who is the annuitant, and who is the beneficiary, not only to make sure that client’s wishes will be followed upon their passing, but because of the potential tax ramifications.  John shared many examples of instances where client wishes were not met, and some that had negative tax consequences.  Especially important is who’s death triggers the benefit, and to check with the issuing insurance company to see how they handle a situation when the owner and annuitant are different.  He gave examples of how different insurance companies handle the same situation in different ways.

If the owner and annuitant are the same, generally things are more straight forward, if they are different, you want to check with your insurance company to see how they handle the death of either and make sure that it follows you wishes.