Why is this a point of confusion? Well, it may be because Form 8606, the form on which nondeductible contributions are tracked, is titled “Nondeductible IRAs.”
Some taxpayers fail to file Form 8606 when they make nondeductible contributions and many more will forget to keep up with the matter over the years.
The burden to track nondeductible IRA contributions lies with the taxpayer. If nondeductible contributions are not tracked appropriately, upon distribution, or conversion to a Roth IRA, the taxpayer or their beneficiaries can pay taxes on funds on which taxes had already been paid.
“I’m working so I don’t have to worry about RMDs.” This one probably stems from the exemption that applies to 401(k)s.
The key is the exemption only applies to the qualified plan from the current employer. RMDs are still required from traditional IRAs, SEPs, SAR-SEPs and SIMPLE IRA plans. Only personal Roth IRAs are excluded.
RMDs start at about 3.7 percent of the IRA balance and don’t exceed 5 percent until one turns 79. Many clients do not find RMDs particularly burdensome but many find them annoying and some make the mistake of letting their annoyance determine their strategy.
I see three tactics to reduce the taxes attributable to RMDs more than others.
First, if the plan allows it, roll existing IRAs into the active qualified plan. Do this now and no RMDs will be needed in 2018 or beyond while the client is still working. A common hesitation arises when the qualified plan stinks or the assets in the IRA can’t easily transfer.
Second is to convert IRA balances to Roth IRAs. The client cannot convert amounts attributable to an RMD but additional amounts can be converted. One downside is clients that don’t like taxable income from RMDs will incur even more taxable income upon the conversion.
Last is the use of qualified charitable distributions, a payment made directly from an IRA to a qualified charity. You can’t convert RMDs to Roths, but you can give RMDs away to charity. For charitable clients, QCDs are worth a look. For those using the standard deduction, it can save quite a bit of money.