401(K) Contribution Limits and Late RMDs: Today’s Q&A Mailbag


Ed, great article on reasons for taking RMDs early in the year, but here’s the other side of the argument, at least for me (which is why I am responding via email rather than online).

My wife and I are both retired.  We have a pension, social security and then comparatively large RMDs.  We have no withholding and do not file quarterly estimated taxes.  Rather, we have all our withholding done via our RMDs.  As you know, a special rule allows us to allocate those payments back to prior quarters, so we avoid any penalties.

However, in order to do this, we need to wait until the fall, so we can get an idea of what our total tax liability (federal and state) will be.  I don’t even think about it until I get the current version of TurboTax.  This is even more true this year, with a whole new tax code.

Plus, we don’t want to give up tax deferred earnings for the better part of a year.
So, I agree with all your reasons for early withdrawals, but I can’t see how I can have it both ways.  Let me know if I’m missing something.
Thanks.  Joel



Hello, Joel:
There’s no one best time to take an RMD, you have to choose amid trade-offs.
There are reasons to take an RMD early. Missed RMDs are subject to a 50% penalty, and taking one early assures it won’t be missed as a last-minute RMD might be due to oversight, illness or some unexpected event.  If an IRA owner dies before taking a last-minute IRA, it may be practically impossible for the IRA beneficiary to take it before year end. And if one is planning to make a Roth IRA conversion, any RMD due from the IRA for the year must be taken first.
But, as you note, taking your RMD late in the year and having your IRA custodian withhold income tax from it provides a unique benefit.  The withholding, even if it occurs just before year-end, is credited as if it occurred at an even rate over the entire year. You can even increase the amount withheld from the RMD to cover tax owed on your other income received during the year.
This pays off two ways: (1) you keep funds in your IRA earning tax deferred returns for a longer period, and (2) you help your cash flow by deferring paying the income tax you owe until late in the year. In contrast, if you paid the income tax through quarterly estimated payments by paying all the tax in the year-end payment you could owe a late-payment penalty.
There’s no one “right” answer.  Each IRA owner must make a choice.



Quick question:
I just switched jobs and this is going to be my first experience with a 401K.  The employer will deduct 6.5% of my salary pre-tax and deposit in the 401K.  However, the total amount they deduct will be much less than the limit for an IRA deduction, lets say they will deduct over the rest of 2018, $4000.
Can I make a deductible IRA contribution of the DIFFERENCE between the amount my company deducted for the 401K and the IRA contribution limit (I turn 50 in 2018 so its $6500).??
Will that be deductible and not subject to income limits?
What do you suggest that I do so that I take advantage of the full retirement contribution deductibility?
Thank you for answering,


Hello Milton:
The good news for you is that the 401(k) and IRA dollar contribution limits are independent. No matter how much you save in your 401(k) you can contribute $6,500 to an IRA because you are age 50 (the limit being $5,500 for younger persons).
However, because you participate in an employer’s retirement plan your ability to deduct an IRA contribution will phase out as modified adjusted gross income (MAGI) rises from $63,000 to $73,000 on a single return or from $101,000 to $121,000 on a joint return.
Even if your MAGI exceeds that limit you still can make a full $6,500 contribution to a Roth IRA if your MAGI doesn’t exceed $120,000 on a single return or $189,000 on a joint return. And no matter how high your income, you can make a full contribution to a traditional IRA, and if you wish convert it to a Roth IRA.
In addition, to take full advantage of your retirement plan options, ask your 401(k) plan administrator if it is possible to make additional voluntary contributions.  Some plans allow these, such as to 401(k) Roth accounts.

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