When you reach your 70s, the IRS requires you to start taking Required Minimum Distributions from your retirement plan account. A Required Minimum Distribution (RMD) is the minimum of what you are required to withdraw from your retirement plan account on a yearly basis.
Like many other people, you probably have an IRA. There is also a chance that it’s one of the largest financial assets you own – if not the largest one.
If you don’t begin withdrawing the proper amount by the specified deadline, a stiff penalty may be imposed by the IRS.
What Happens if I Don’t Meet the Deadline?
If you are at or near your early 70s, take heed! The IRS gives a big incentive for you to take RMDs on deadline, and to do it right: a 25% penalty on the amount not taken. Say you forgot to take out $20,000 – you would have to cough up $5,000 for the 25% excise tax as well as the income tax you owed.
What is the Deadline for RMDs?
The age at which you start required minimum distributions will depend on your age now.
If you were born on June 30, 1949 or earlier, you have already started RMDs at 70.5 and will have to continue taking them. For those born on July 1, 1949, through and including December 31, 1950, RMDs would have started at age 72. If you were born on January 1, 1951, through and including December 31, 1959, the age for starting your RMDs is 73. For those born on January 1, 1960 or later, an adjusted age for starting RMDs at 75 will take effect in 2033, unless the law is changed again.
You must begin removing money by April 1 of the year following the year of which your RMD was first triggered.
It may be better to start taking distributions a few years earlier. Doing so will use up your current tax bracket – higher RMDs after age 72 could otherwise bump all of your income into a higher bracket. A financial professional at SafeMoney.com can help you with these calculations.
How Much Do I Need to Withdraw?
The IRS offers worksheets you can go through. However, our featured financial professionals can figure it out for you at no cost or obligation.
Should I Take All the Money Out at Once?
With the 25% excise tax at stake, taking out all your tax-deferred money at one time may seem attractive. But keep in mind this amount is subject to income tax. If you take money out of your retirement savings account, it’s taxable at your maximum tax rate.The lower capital gains rate doesn’t apply. So, the tax rate ranges from 10-37% for the IRS, and your state might want something, too. Required Minimum Distributions receive different tax treatment in different states. Consult with a qualified financial professional for information about your state’s tax laws.
What Accounts are RMDs Imposed on?
These required account withdrawals are set on Traditional IRAs, SIMPLE IRAs, SEP-IRAs, and other retirement plan accounts. Roth IRAs don’t require withdrawals until the death of the account owner.
However, Roth IRA beneficiaries do have to worry about meeting the withdrawal requirements. But these distributions are generally tax-free.
What Are Ways to Reduce Tax Liability?
If appropriate for your needs, goals, and overall financial picture, annuities will help counter the negative effects of your distributions being taxed. It provides tax-sheltered money growth, which will help cover your payments in income tax for each distribution.
Another advantage of an annuity is peace of mind. The insurance companies help their policyholders by ensuring the right amount is taken out at times of distribution. So your RMDs will be automatically taken out without penalty.
What if I Don’t Need the Money?
Some people may not need the money from the distributions when they reach the age at which they must start RMDs. This is a great opportunity to strengthen the legacy they leave to their loved ones. Putting funds into an annuity lets you fund a life insurance policy for your loved ones, which has a death benefit that is tax-free.
What about Special-Case Needs or Other Questions?
There’s much to cover with Required Minimum Distributions. For instance, say you lost a bundle in the market. If there wasn’t enough money in your account to cover the RMD (or so where the RMD exceeds the entire account balance), the IRS says the account can be emptied without penalty.
It pays to have the assistance of a qualified professional for guidance. If you have any other questions, or seek guidance from a knowledgeable financial professional, don’t hesitate. Call our team today!
Need help with creating an income management strategy for your retirement years? SafeMoney.com can help you. Use our Find a Financial Professional section to connect directly with an independent financial professional, and to request a personal strategy session. Should you have any questions or concerns, call 877.476.9723.
