Your Guide to Required Minimum Distributions (RMDs)

As retirement approaches, it’s essential to know the rules governing your retirement accounts. One major concern for retirees is understanding Required Minimum Distributions (RMDs) and how they can impact your cash flow and taxes. Recent changes in RMD rules make it even more critical for individuals near retirement age to familiarize themselves with these requirements. The guide linked below provides a comprehensive overview to help you navigate RMDs.

What is a Required Minimum Distribution (RMD)?

When you have contributed money into a tax-deferred account like a 401(k) or IRA, Uncle Sam eventually wants to collect those taxes. For most individuals, starting when you turn 73, the IRS requires that you take a Required Minimum Distribution (RMD) – the minimum amount you need to withdraw from your retirement account each year. With the new rules, those born in 1960 or later can wait until age 75 to begin RMDs. Everyone else must start at age 73 or earlier.

Calculating Your RMD:

To calculate your RMD, most people can use the IRS table provided. Exceptions apply if your spouse is the beneficiary and ten years younger than you, and different rules apply for inherited IRAs.

Start by finding the 12/31 balance of your IRAs for the previous year. If you have multiple IRAs, add the balances together. Then, divide the 12/31 IRA balance by the Distribution Period factor corresponding to your age on the IRS table based on your birthday that year. Different types of accounts, like 401(k)s and IRAs, should be calculated separately. Additionally, Roth IRAs are exempt from RMDs, and inherited IRAs require a different calculation.

Penalties and Exceptions:

Forgetting to take your RMD can result in a stiff penalty. The IRS imposes a 25% penalty on the amount not withdrawn. If corrected early, the penalty may be reduced to 10%. The first RMD must be calculated in the year you turn 73, and for your first distribution, you have the option to delay it until April 1st of the following year. After that, your annual distribution must be taken by December 31st. Be aware that delaying the first distribution means taking two distributions in the second year, which can potentially increase the taxes owed.

Understanding and planning for Required Minimum Distributions is crucial for individuals nearing retirement age. Glassman Wealth’s What Is Your RMD? guide can help you familiarize yourself with the rules, including how to use the IRS table for calculations. Please get in touch with your advisory team with any questions about your distribution requirements or financial plan.