Watching your retirement savings grow is one of the most rewarding parts of long-term financial planning. But as you enter your golden years, there is an important IRS rule you need to keep on your radar: RMD – Required Minimum Distribution.
RMDs are required by the federal government and enforced by the IRS. In short, this means that eventually, you have to start taking withdrawals from your retirement accounts.So as Everest Financial’s month-by-month financial checklist series continues, let’s break down the RMD basics, so you know what to expect.
What is an RMD?
Simply put, your RMD is the minimum amount you must withdraw from your qualifying retirement accounts each year. Of course, you are always welcome to withdraw more than the minimum if you need it to fund your retirement lifestyle, but you cannot take less.
These withdrawals will generally be included in your annual taxable income. The only exceptions are portions previously taxed (your basis) or distributions that are received tax-free, such as qualified distributions from a designated Roth account.
Which accounts do RMD rules apply to?
The minimum distribution rules apply to original account holders (and their beneficiaries) in a variety of plans, including:
Traditional IRAs
SEP and SIMPLE IRAs
401(k) and 403(b) plans
457(b) plans
Profit-sharing and other defined contribution plans
The Roth Exception: If you hold a Roth IRA or a Designated Roth account within a 401(k) or 403(b) plan, you are not required to take withdrawals while you are alive. However, if you inherit one of these accounts, beneficiaries of Roth accounts are still subject to RMD rules.
When do I have to start?
For most people, the magic number is age 73. For each year after your required beginning date, you must withdraw your RMD by Dec. 31, but the exact deadline for your very first RMD depends on the type of account you have:
IRAs (including SEPs and SIMPLE IRAs): Your first RMD must be taken by April 1 of the year following the calendar year in which you turn 73.
Workplace Plans (401(k), 403(b), etc.): Your first RMD is generally due by April 1 following the later of the year you turn 73, or the year you retire (provided your specific employer plan allows you to delay taking your RMD until retirement).
How is my RMD calculated?
A specific formula determines your required minimum distribution for any given year. It is calculated by taking your account balance as of the end of the immediately preceding calendar year and dividing it by a distribution period found in IRS Table III – the Uniform Lifetime Table.
There are exceptions to this rule. For instance, if your sole beneficiary is your spouse and they are 10 or more years younger than you, you will use Table II – Joint Life and Last Survivor Expectancy – to determine your payout period. For beneficiaries who are not the spouse of the IRA owner, you will use Table I – Single Life Expectancy.
All of these tables and other pertinent RMD information can be found in IRS Publication 590-B. (Tip: If you’re on the IRS website looking for these tables, you’ll need to scroll down quite a ways on this page.)
Act now; avoid hassles later
While this must be completed by Dec. 31, you might have questions now. Let’s address them early so when the end of the year arrives, you won’t be scrambling.
Call our office at 859-291-9290 to schedule an appointment with me, or send me an email at joe@everestfinancial.net, and let’s get moving on this now. Here at Everest Financial Inc., we are committed to helping you thrive in retirement, not just survive. If you are approaching 73 and want to review your RMD strategy, contact me today.