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Required Minimum Distribution

When you reach 70.5 years old, 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’re required to withdraw from your retirement plan account on a yearly basis.

Like many of our clients, you probably have an IRA. There’s a real good chance 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’s Happens if I Don’t Meet Deadline?

If you’re at or near 70.5 years of age, take heed! The IRS gives a big incentive for you to take RMDs on deadline, and to do it right: a 50% penalty on the amount not taken. Say you forgot to take out $20,000 – you’d have to cough up $10,000 for the 50% excise tax as well as the income tax you owed!

What is the Deadline for RMDs?

You must begin removing money by April 1 of the year following the year you turn 70.5 years old. In other words, if you turned 70.5 years old anytime this year, the first withdrawal is due April 1 of next year. 

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 70.5 could otherwise bump all of your income into a higher bracket. We can help you with these calculations.

How Much Do I Need to Withdraw?

The IRS offers worksheets you can go through. However, we can figure it out for you at no cost or obligation. Here’s part of how to calculate a minimum distribution amount: Using this table, take your age and find the corresponding distribution period. 

Then, divide the value of your IRA by the distribution period to find the required minimum distribution.

Should I Take All the Money Out at Once?

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Differences between
401(k)s and IRAs

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With the 50% 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 10-35% 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?

Withdrawal requirements at age 70.5 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. 

RMD Required Minimum Distributions imgWhat Are Ways to Reduce Tax Liability?

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 70.5 years of age. 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 retirement planner, don’t hesitate. Call our team today! 

Have any other questions or need help with determining your Required Minimum Distributions? Call us at 877.GROW.SAFE (877.476.9723) for expert advice! 

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