How To Avoid Double Taxation Of Unused Required Minimum Distributions?

paoli2 | Nov 1, 2015 | 2,641 posts since 2011

When retirees reach 70 1/2 and have to withdraw their Required Minimum Distribution from their IRAs they pay taxes on the amount and if it is a hefty withdrawal, it can also cause them to pay higher social security taxes. If they don't need the total RMDs for a particular year and just decide to put some in a taxable CD or saving account is this in any way causing some type of "double taxation" since we already paid taxes upon withdrawal of the RMD?

Are we protected by the fact that we are not paying taxes again on the entire RMD but on just the interest on the amount we put into the CD or other account? Thanks for any information you can provide.

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Answers

gbtexas | Dec 20, 2015 | 78 posts since 2013

First, social security taxes don't increase if the RMD causes your AGI to go above 170k. Medicare taxes increase, however. Secondly, you're not going to be double taxed. It's best to separate the two events--RMD and interest earned on a later investment after taking the RMD. The RMD pertains to funds stored into a tax deferred obligation. After you take an RMD from the deferred account, it becomes like any other non-deferred money. Thus, when these funds are placed into a CD or any other non-deferred account, FIT will be incurred. As a footnote, you're not required to withdraw only the RMD amount. This amount is only the floor. You can take out just this, or you can take out everything, or any amount in between. Of course, you may be subject to penalties imposed on early withdrawal on the amounts w/drawn above the RMD.

Ally6770 | Dec 22, 2015 | 4,290 posts since 2010

When you reinvest in a matured CD do you call the double taxation?

Kent Dark | Dec 20, 2015 | 1 posts since 2015

Pay yourself first, I would suggest looking into a HSA. The limits on 2016 contributions are from $3,350 to $6,750, depending on the plan and your deductible. What with interest rates being so low, I would not pay the government anymore then I had to. Granted the money has to be used for medical expenses, but who doesn't have medical bills that are as high as a cats back ?!!!

Anon456 | Dec 21, 2015 | 249 posts since 2011

Kent - I understood that if you are on MEDICARE (usually are by 70.5 RMD time) that you cannot contribute to an HSA. Is that not right?

MidAtlantic | Dec 21, 2015 | 142 posts since 2012

That is correct. Once you enroll in Medicare you may no longer contribute to an HSA.

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