Tax Considerations (RMDs)

Income tax

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.

Estate tax

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.

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