Category: Required Minimum Distributions

Before you retire, consider planning for your required minimum distributions (RMDs). This can be more complicated than you imagine if you have significant retirement assets in qualified plans, but with a little planning, you can achieve a tax-friendly result.

KNOW THE RULES

Retirees can wait until April 1 of the year after their 73rd birthday to begin taking withdrawals. In 2033, the age for taking RMDs will increase to 75. There is a penalty tax for missing a required withdrawal.

CONSIDER THESE MOVES

Converting some traditional IRA assets to a tax-free Roth IRA during lower-income years to limit the future income tax bite (you’ll pay ordinary income tax upon conversion). You can also invest some IRA money in a Qualified Longevity Annuity Contract (QLAC), which can delay required payments for several more years.

Bruce has been taking required minimum distributions (RMDs) from his retirement accounts for four years, and he’s concerned that the amount of required withdrawals will lead to premature asset depletion. What can he do?

One quick way to look at RMDs is that they are required distributions, not required spending. While Bruce is required to take withdrawals each year, he’s free to reinvest the amounts. In some cases, he can put the funds into a Roth IRA, and he can always put the RMD proceeds into a taxable brokerage account.

Total portfolio withdrawals matter to portfolio sustainability, so if Bruce is concerned that his RMDs are too high, he can hold back on withdrawals from his non-RMD-required accounts.

And unless Bruce’s goal is to leave substantial assets to charity or his heirs, withdrawals should step up as the years go by and life expectancy declines. RMDs start at 3.6% but ramp up to nearly 12% by age 95. Since these percentages may seem high compared to the 4% rule some retirees are familiar with; Bruce should consult with his financial professional to find the best solution for his situation.

_{Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.}

After being suspended for 2020 via the CARES Act, required minimum distributions (RMD) are back for 2021.

RMDs are required for everyone with a traditional IRA or employer-sponsored plans like 401(k)s or Roth 401(k)s starting at age 72. If you’re turning 72 in 2021, you have until April 1, 2022, to make your RMD. But in each subsequent year, you’ll need to take your RMD by December 31. So that means if you delay taking your first RMD until April 1, you’ll have two withdrawals in 2022 and that could create a higher tax liability.

RMDs are taxable, so plan to have taxes taken out of your distribution to avoid underpayment penalties.

Failing to take your RMD by the due date comes with a 50% penalty. And if you don’t need the money, consider investing the distributions in a taxable account for continued growth or giving the RMD to a qualified charity.

The SECURE Act pushes required minimum distributions (RMDs) from an IRA, SIMPLE IRA, SEP IRA or retirement plan account to age 72, up from age 70 1/2. However, you’re out of luck if you are younger than 72 but were 70 1/2 in 2019. You’ll have to begin taking withdrawals by the former age limit of 70 1/2 limit.

Understanding RMDs

Calculate your RMDs by dividing your life expectancy, as determined by the IRS’s Uniform Lifetime Table, into your account balance as of the end of the immediately preceding calendar year. Different rules may apply if your account’s sole beneficiary is at least 10 years younger than you or if you continue working past age 72.

Plan for Withdrawals

When planning your withdrawal strategy, know that you may withdraw more than your RMD each year, but you can’t take less. You can also begin distributions earlier than required.

Talk to your tax and plan professionals to learn more.