Contributed by: Nicholas Boguth, CFA®, CFP®
“What is a required minimum distribution?”
RMDs are the amount you are required to withdraw from your retirement accounts once you reach your required beginning date. Remember all those years you added money to your IRA and 401k and didn’t have to pay tax on those contributions? Well, the IRS wants those taxes EVENTUALLY – which is why we have RMDs. These required distributions ensure that you will spend down the assets in your lifetime, and the IRS will receive tax revenue on that income.
“When do I have to take RMDs?”
When you turn 73. This age has changed multiple times in the past few years from 70.5 to 72 and is intended to change further to 75 in 2033, but for now, anyone turning 73 in the next nine years will have to begin taking RMDs. You must withdraw the RMD amount by December 31st of each year (one minor exception is being allowed to delay until April in your first RMD year).
“What accounts do I have to take an RMD from?”
Most retirement accounts such as IRAs, SIMPLE IRAs, SEP IRAs, Inherited IRAs/RIRAs, and workplace plans such as 401k’s and 403b’s require RMDs. RMDs are NOT required from Roth IRAs during the account owner’s lifetime.
“How much will my RMD be?”
The IRS provides tables that determine RMD amounts based on life expectancy. For anyone taking their first RMD this year at age 73, the current factor is 27.4. So, for example, if you have $500k in your IRA, then you will have to distribute $500k / 27.4 = $18,248. That number may be lower if your spouse is listed as the beneficiary and is more than ten years younger than you.
“What if I don’t take my RMD?”
There is a 25% penalty on the RMD amount.
“Can I withdraw more than the RMD amount?”
Yes.
“What if I’m still working?”
For most accounts, such as IRAs, you must still take your RMDs. If you have a 401k with your employer, you may be able to delay RMDs in that account until you retire.
“Will my beneficiaries have to take RMDs after I am deceased?”
Yes. These rules have also changed recently, and like most things in the IRS, there are plenty of caveats and asterisks, but generally speaking, your beneficiary will have to deplete the account within ten years. Certain beneficiaries, such as your spouse, have more options for determining required distributions.
Tax-deferred accounts like IRAs and 401ks are a significant part of most retirees’ financial plans, so many of us will have to navigate this topic. We’re proud to say that we’ve been helping clients navigate the maze of retirement accounts, RMDs, and beneficiaries for over thirty years, so we are here to help if you have any questions.
Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.