Required Minimum Distributions Revealed
Reaching 72 doesn’t need to create confusion regarding retirement accounts.
If you’re like many people who have reached retirement age, you’ve spent decades contributing to retirement accounts and building wealth so that your retirement years will be comfortable, enjoyable and financially stress-free. However, there are IRS rules regarding retirement accounts that shouldn’t be taken lightly or overlooked. Reaching that all-important age of 72 is a milestone with regard to your retirement accounts, as it means that a Required Minimum Distribution (RMD) must be withdrawn and taxes must be paid.
To which types of accounts does the RMD apply? These accounts are IRAs including SEP and SIMPLE, profit-sharing plans, and defined contribution plans. It may seem like an easy task to simply begin receiving your RMD payments, but there are many factors to consider that make these distributions complex. Rules for the calculations vary based on the plan type, age, birthday, and spouse’s age. Plus,if you have multiple accounts, figuring the RMD amount, especially in your first year can be tricky.
If your first thought is “Well, I don’t need the money right now, why don’t I just roll over the RMD into another IRA,” this would not be a viable option. Rolling over your RMD to another IRA would be treated as an excess contribution and would need to be removed from the account within a narrow timeframe to avoid penalties and taxes. The IRS has allowed the IRA to stay tax-deferred for years, but they do need to collect eventually, starting in the calendar year in which you turn 72.
There may be options that could benefit your financial situation such as donating your RMD to charity. If Congress agrees to continue the Qualified Charitable Distribution option going forward, this choice could help in lowering taxes if the money is moved directly to a charity (IRA accounts only)
There are certainly options for putting the RMD to good use too:
If you’re a hands-on investor who prefers to calculate your own RMD, you’ll need the value of your retirement account for the previous year-end as well as your life expectancy number, which is obtained from the life expectancy tables set forth by the IRS at www.irs.gov. The previous year fair market value is then divided by your life expectancy number to produce your RMD amount for that year.
As always, it’s best to consult your financial advisor and tax professional to assist with RMD options and answer questions related to IRS rules before making decisions. You certainly don’t want to get too comfortable in retirement, miss your RMD deadline and have the IRS assess a 50% tax on the amount that was required to be withdrawn!
After all of those decades of diligently contributing to your retirement, reaching RMD age isn’t the time to make mistakes that can be easily avoided.
There are many other creative options that can apply to RMDs. If you’re nearing 72 or have questions about your RMD or your financial situation, please schedule an appointment with one of our financial advisors here.