If you are approaching or already in retirement, then you are probably at least somewhat familiar with \u201crequired minimum distributions\u201d (RMDs).\u00a0 The term applies to the distributions that the Internal Revenue Service (IRS) requires you to take from a retirement account.\u00a0 The rules surrounding these distributions have changed several times in just the past few years.\u00a0 The following Q&A guide will get you current and help you make wise decisions for a secure retirement.<\/p>\n
A required minimum distribution is the minimum amount that the IRS requires you to take from your retirement accounts once you reach age 72.\u00a0 You might remember that, under the old rules, the IRS required these distributions beginning at age 70 \u00bd.\u00a0 \u00a0The change was included in the SECURE Act which was passed in 2019.<\/p>\n
If you are still working, you do not own more than 5% of the business for which you work and you have a retirement<\/a><\/strong><\/span> account with your employer, you may defer taking an RMD from your account in your employer\u2019s plan (e.g. 401(k) or 403(b)) until April 1 of the year after you retire.\u00a0 This exception does not apply to your other retirement accounts.<\/p>\n If you own 5% or more of the business sponsoring your retirement account, you must take the RMD once you reach age 72, regardless of whether you are retired.<\/p>\n The IRS states that the RMD rules apply to all employer-sponsored retirement plan, including 401(k), 403(b), and 457 plans.\u00a0 They also apply to traditional IRAs and IRA-based plan such as SEPs, SARSEPs, and SIMPLE IRAs.\u00a0 The rules also apply to a Roth 401(k) plan, but not Roth IRAs.<\/p>\n You have to take your first RMD for the year in which you turn age 72.\u00a0 However, you can postpone this distribution until April 1 of the following year.\u00a0 If you do this, you will be required to take two distributions in that year.\u00a0 One will be the amount calculated for the prior year (age 72) and one will be calculated for the current year (age 73).\u00a0 All future RMDs must be taken no later than December 31.<\/p>\n <\/p>\n The IRS requires you to take distributions annually from your retirement accounts in a manner that would eventually empty them at the end of your life.\u00a0 The IRS does this by requiring you to divide the balance in your retirement accounts as of December 31 of the prior year by a life expectancy factor.<\/p>\n So, if you are age 72, your life expectancy from the IRS tables<\/a><\/strong><\/span> is 15.5.\u00a0 If the value of your retirement account on December 31 was $1 million, then your RMD for the next year is $64,517 ($1 million\/15.5).<\/p>\n There are different factors for various beneficiaries of retirement accounts.\u00a0 You can learn more on the IRS website<\/a><\/span><\/strong>.<\/p>\n You have to calculate the RMD for each retirement<\/a><\/span><\/strong> account.\u00a0 However, you can take the total RMD for all your IRAs from one or more of them and you can do the same thing with all of your 403(b)s.\u00a0 However, you have to take RMDs from other retirement accounts such as 401(k) plans separately from each account.<\/p>\n Your RMD will be subject to federal, state and (relevant) local income taxes.\u00a0 However, if you have made after-tax contributions to the plan, those may be recovered tax free.\u00a0 Also, distributions from a Roth IRA are not subject to taxation.<\/p>\n If you fail to take your full RMD by the deadline (December 31), the amount not withdrawn is subject to an excise tax of 50%.\u00a0 For example, if your RMD is $50,000 and you only withdraw $30,000, the penalty is $10,000 (50% of $20,000 ($50,000-$30,000)).\u00a0 Clearly, for a secure retirement, you want to avoid this.<\/p>\n Actually, there are circumstances when this can make sense.\u00a0 It really depends on your tax circumstances.\u00a0 If you incurred high medical expenses, made large charitable contributions or had other substantial itemized deductions that together exceed your personal exemption, then taking a larger distribution from your retirement account might make sense.\u00a0 The extra income would be reduced by the large deductions.<\/p>\n If you are trying to move funds into a non-retirement account for eventual transfer to your heirs, taking a larger distribution than you need could be attractive.\u00a0 This is particularly true, if your tax rate is lower than those of your heirs.<\/p>\n You could also take a larger distribution from an IRA (i.e. greater than the RMD) and convert some of it (up to the limit) into a Roth IRA.\u00a0 Remember, that funds in a Roth IRA grow tax free and they are not subject to the RMD rules.<\/p>\n Be sure to consult with your tax professional before taking any action, as the rules are complex.<\/p>\n These after-tax contributions can be withdrawn tax free.\u00a0 However, it is important to keep careful records of the contributions.\u00a0 The RMD calculations will require you to segregate your non-deductible contributions from your deductible contributions<\/p>\n Yes, and this can be very attractive for those who are charitably inclined.\u00a0 If you do not need the funds you are required to take from your retirement account, you can instead make a direct distribution of your RMD to a qualified charity.\u00a0 This is called a qualified charitable distribution (QCD)<\/p>\n The QCD is a win-win strategy.\u00a0 The charity benefits from your contribution of your distribution from your retirement<\/a><\/span><\/strong> account.\u00a0 You benefit, because you will not be taxed on the distribution.\u00a0 Given that most American are no longer able to deduct their charitable donations, the QDC offers an equivalent tax benefit.<\/p>\n Making a QDC requires some planning.\u00a0 You must have the custodian of your retirement account make the distribution directly to the charity.\u00a0 You must also report the transaction properly on your tax return.\u00a0 You can direct up to $100,000 annually of your IRA to charity.\u00a0 Also, you can do this as early as age 70 \u00bd.<\/p>\nWhat if I own my business?<\/strong><\/h2>\n
What types of retirement plans require minimum distributions?<\/strong><\/h2>\n
When do I have to take my RMD?<\/strong><\/h2>\n
Want to learn more about retirement planning? Contact our team at Springwater Wealth today to learn how we can help you develop a plan for your financial future.<\/span><\/a><\/strong><\/h2>\n
How are my RMDs calculated?<\/strong><\/h2>\n
What if I have multiple retirement accounts?<\/strong><\/h2>\n
What is the tax treatment of an RMD?<\/strong><\/h2>\n
What happens if I don\u2019t take my RMD?<\/strong><\/h2>\n
Should I ever take more than my RMD, if I don\u2019t need the funds?<\/strong><\/h2>\n
What about my non-deductible contributions to my retirement account?<\/strong><\/h2>\n
Is there a way for me to make a charitable donation with my RMD?<\/strong><\/h2>\n
Am I required to take a distribution in 2020?<\/strong><\/h2>\n