Learn how RMDs work, when required minimum distributions begin, how RMDs are calculated, and what to review before the year-end deadline.
If you have a retirement account subject to required minimum distribution rules, your RMD can become an important part of your retirement income planning. Required minimum distributions (RMDs) are the minimum amounts you generally must withdraw each year from certain retirement accounts after reaching the applicable RMD age.
For most individuals, RMDs generally begin at age 73. However, you can choose to delay your first RMD until April 1 of the year following the year you reach age 73. Because RMD rules can depend on your age, birth year, account type, employment status, and other circumstances, it is important to confirm when your RMDs begin and how they fit into your overall retirement planning strategy.
If you are approaching your RMD age or reviewing your year-end finances, here is a checklist to help you prepare:
- Identify Your Retirement Accounts
Start by making a list of all retirement accounts that may be subject to RMD rules.
This may include:
- Traditional IRAs
- SEP & SIMPLE IRAs
- 401(k), 403(b), 457(b) plans
- Profit-sharing plans
- And other qualifying employer-sponsored retirement plans
RMD rules can differ depending on the type of account, so don’t assume one calculation applies to everything you own.
- Confirm How Much You Need To Take
Generally, your RMD is calculated using the retirement account’s balance from December 31 of the previous year divided by a life expectancy factor from the applicable IRS table. For example, the IRS provides different tables for account owners and certain beneficiaries, including situations involving a spouse who is more than 10 years younger.
Keep in mind that if you have multiple IRAs, you generally calculate the RMD for each IRA separately, but you may be able to take the total from one or more of your IRAs. Other plans, such as 401(k)s and 457(b)s, generally require you to take the RMD separately from each plan. Your account custodian or plan administrator may calculate your RMD, but you’re ultimately responsible for taking the correct amount by the deadline.
- Don’t Miss The Deadline
After your first RMD, annual RMDs generally must be taken by December 31 each year. But you don’t necessarily have to wait until the end of the year. RMDs can be taken periodically throughout the year or later in the year, depending on your circumstances.
Missing an RMD can result in an excise tax of 25% of the amount that should have been withdrawn. The penalty may be reduced to 10% if the missed RMD is corrected within two years. In some cases, the penalty can be waived if the missed distribution resulted from reasonable error and reasonable steps are being taken to correct the shortfall.
It is always best practice to review your RMD requirements before the deadline rather than waiting until a missed distribution becomes a problem. If you are approaching year-end and have not yet taken your required distribution, confirm the amount and deadline with your account custodian or financial professional.
- Review & Consider The Tax Impact
RMDs from traditional retirement accounts are generally included in taxable income. You can take more than your RMD, but taking more than the minimum is allowed, but a larger distribution can create a larger taxable-income obligation. Before taking a distribution, consider how it fits into your broader retirement income and tax planning strategy.
If you don’t need the money to cover your expenses, consider how your RMD fits into your overall retirement income and tax planning strategy before taking the distribution.
- Don’t Assume: Check For Exceptions and Special Circumstances
Some individuals who continue working past age 73 may be able to delay RMDs from their current employer-sponsored retirement plan until they retire, provided you do not own 5% or more of the business sponsoring the plan. This generally doesn’t apply to traditional IRAs or plans from previous employers.
Roth accounts and inherited IRAs also have different rules. Roth IRAs and designated Roth accounts generally don’t require RMDs while the original owner is alive, while beneficiaries of Roth accounts are subject to RMD rules.
Inherited IRAs can be complex with rules dependent on factors such as when the original owner died and your relationship to that person. If you’ve inherited an IRA, make sure you understand the rules that apply to your specific situation before taking or delaying a distribution.
- Plan Ahead for Your RMD
RMD rules may seem straightforward, but the details can become more complicated when you have multiple retirement accounts, inherited assets, a workplace retirement plan, or a need to coordinate retirement income with your broader financial plan. And it’s more than a year-end withdrawal requirement.
For many retirees, they are an important part of managing retirement income and taxable income. If you are approaching your RMD age or reviewing your year-end retirement checklist, working with a financial professional can help you understand how your required distributions fit into your overall retirement strategy.
As your financial advisors in Santa Barbara, Tremblay Financial Services can help you understand how required minimum distributions fit into your retirement income strategy. Call us at 888.569.1982 to schedule a conversation!
This material is for informational purposes only and should not be considered tax or legal advice. RMD rules can vary based on individual circumstances, account type, beneficiary status, employment status, and other factors. Consult your tax or legal professional regarding your specific situation.
Sources:
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
https://www.investopedia.com/terms/r/requiredminimumdistribution.asp
https://investor.vanguard.com/investor-resources-education/retirement/rmd
