The ABCs of RMDs

​Turning 70 soon? If so, the IRS may have a gift for you. It’s required minimum distributions, also known as RMDs. As the name suggests, RMDs are mandated withdrawals from your retirement account. They’re required if you own a traditional IRA, 401(k) plan or similar qualified account.
 
As you likely know, traditional IRAs and 401(k) plans are treated as tax-deferred accounts. You don’t pay taxes on growth inside the account as long as you don’t take a withdrawal. Also, you may have made contributions to the account with pretax dollars. That means the entire amount of your IRA or 401(k) dollars may be untaxed.

While tax deferral is a powerful tool, you can’t defer taxes forever. Eventually, the IRS wants to tax your accumulated growth. When you’re age 70½, the IRS requires you to take taxable distributions out of your tax-deferred accounts. The exception to this rule is the Roth IRA. Since Roth distributions are tax-free, they’re exempt from the RMD rule.
 
Not sure how RMDs will impact your retirement? Below are a few common questions and answers about RMDs and how to plan for them:

When do RMDs start?
The RMD age is 70½, but you don’t start distributions on the day you reach that age. The formula for when to begin is a bit more complicated than many retirees assume. You have until April 1 following the calendar year in which you turn 70½ to take your first RMD from an IRA.1

The rules for your 401(k) are slightly different. If you’re retired, the rules are the same as they are for an IRA. If you’re still working past age 70½, however, you can delay RMDs from your employer’s 401(k) plan until April 1 following the calendar year in which you retire. Keep in mind that this applies only to the 401(k) from your current employer, not balances from previous employer plans.1

How much will your RMD amount be?
Your RMD amount depends on your account balance and your age. The IRS has a helpful worksheet you can use to estimate your distribution. The agency assigns a factor for each age past 70½. The factor decreases as you get older. You simply divide your Dec. 31 account balance by the factor for the relevant age.

Since the factor gets smaller as you get older, your withdrawal will increase relative to your balance. If you live into your 90s, you could be withdrawing 10 percent or more of your balance each year as an RMD, so it’s important to plan appropriately.2
 
If you have a spouse who’s at least 10 years younger than you, your distribution formula is different. You can use a joint schedule that utilizes different factors. The same is also true if you are an IRA beneficiary. You may want to consult with a financial professional to get an accurate distribution estimate.

How are RMDs calculated if you have multiple IRAs or 401(k) plans?
It’s possible that you have multiple IRAs or 401(k) balances. It’s not uncommon for individuals to accumulate several qualified accounts throughout their career. The RMD rules regarding multiple accounts differ slightly for IRAs and 401(k)s.
 
For IRAs, you can simply aggregate your total IRA balances and then take the appropriate RMD from one account. You can also take the RMD from several accounts if you wish. As long as you’re taking the appropriate total RMD for your IRAs, it doesn’t matter which IRA the distribution comes from.
 
If you have multiple 401(k) plans, you have to take a unique RMD from each 401(k) balance. That could be complicated if you have multiple 401(k) balances from former employers. For simplicity’s sake, you may want to consider consolidating those balances into an IRA. That could reduce the risk that you accidentally forget to take an RMD.

What happens if you fail to take your RMD?
If you miss an RMD, either accidentally or intentionally, you could face a 50 percent excise tax on the skipped amount.1 However, the IRS does offer corrective programs. If you miss a distribution, you may be able to work out a plan with the IRS to make up the distribution and avoid the penalty. Again, a financial professional can assist you.
 
Ready to develop your RMD strategy? Let’s discuss it. Contact us today at Carstens Financial Group. We can help you analyze your accounts and create a plan. Let’s connect soon and start the conversation.


 
1https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
2https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
 
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