Like other distributions from traditional IRAs and retirement plans, RMDs are generally
subject to federal (and possibly state) income tax for the year in which you receive
the distribution. However, a portion of the funds distributed to you may not be
subject to tax if you have ever made after-tax contributions to your IRA or plan.
For example, if some of your traditional IRA contributions were not tax deductible,
those contribution amounts will be income tax free when you withdraw them from the
IRA. This is simply because those dollars were already taxed once. You should consult
a tax professional if your IRA or plan contains any after-tax contributions.
Your distribution may also be income-tax-free if it is
a qualified distribution from a Roth 401(k), 403(b), or
457(b) account. Generally, an RMD is qualified if
your Roth account satisfies a five-year holding period
requirement. If your RMD is not qualified, then generally
only the portion of the RMD paid from your
Roth account that represents earnings will be taxable
to you — your own contributions to the Roth account
are returned tax free. Because RMDs are paid after you turn age 72, or
after your death, they are not subject to early distribution
penalties. Income taxes on RMDs paid to
your beneficiary after your death are generally calculated
in the same manner
as if the payments
were made to you.
Taxable income from an IRA or retirement plan is taxed at ordinary
income tax rates even if the funds represent long-term capital gain or qualifying
dividends from stock held within the plan. Note that there are special rules for
capital gain treatment in some cases on distributions from employer-sponsored retirement
You first need to determine whether or not the federal estate tax will apply to
you. If you do not expect the value of your taxable estate to exceed the federal
applicable exclusion amount then federal estate tax may not be a concern for you. However,
state death (or inheritance) tax may be a concern. In some cases, your assets may
be subject to more than one type of death tax — for example, the generation-skipping
transfer tax may also apply. Consider getting professional advice to establish appropriate
strategies to help reduce and possibly eliminate your future estate tax liability.
For example, you might reduce the value of your taxable estate by gifting all or
part of your required distribution to your spouse or others. Making gifts to your
spouse can sometimes work well if your taxable estate is larger than your spouse's,
and one or both of you will leave an estate larger than the applicable exclusion
amount. This strategy can provide your spouse with additional assets to better utilize
his or her applicable exclusion amount, thereby minimizing the combined estate tax
liability of you and your spouse. Be sure to consult an estate planning attorney,
however, about this and other possible strategies.
In addition to federal estate tax, your state may impose its own
estate or death tax. Consult an estate planning attorney for details.