Required Minimum Distribution

A benefit of reaching retirement age is that you can withdraw money from your retirement accounts penalty free. However, you may also become subject to required minimum distributions (RMDs) at a certain age. RMDs are when you’re mandated to withdraw a certain amount from your retirement accounts every year. Said accounts include various types of IRAs and retirement plan accounts.

How RMDs Work

When you reach an age determined by the IRS, you must withdraw RMDs at a set time every year. The deadline for taking RMDs is usually the last day of the year. Accounts included in this requirement are:

• Traditional IRA
• SEP IRA
• SIMPLE IRA
• Retirement plan accounts
• Profit-sharing plans
• 401(k) plans
• 403(b) plans
• 457(b) plans

Distributions can be taken monthly or in one lump sum if that’s preferable and people may choose to withdraw more than the required RMD amount. Failing to take RMDs can lead to steep penalties, which can eat away from your retirement savings. Account holders who miss RMD withdrawals must pay a percentage excise taxes on the required amount they don’t withdraw. That said, the penalty amount could be reduced if the missed withdrawal is corrected within a certain period of time.

In terms of taxation of withdrawals, the account owner is taxed based on their income tax rate, which means they could end up paying federal and state taxes. If you’re worried about how RMDs might impact your tax bill, note that you can donate up to $100,000 to charity annually. The money must be transferred to an eligible 501(c)(3) charitable organization. Higher RMD withdrawals could push you into a higher tax bracket and increase what you pay in taxes. For this reason, it’s always a good idea to plan your retirement taxes years in advance.

Exceptions to RMDs

There are no RMD requirements on Roth IRAs until the owner of the account dies. However, RMDs do apply to beneficiaries of Roth 401(k) accounts.

Some instances where you can delay RMDs include if you’re still working past the retirement age and have an employer sponsored retirement account. This is known as the ‘still working exception; and you must also own less than 5% of the organization you work for to be qualified for this exemption. Also, traditional IRAs owners don’t benefit from this exception.

How RMDs Are Calculated

To calculate RMDs, you divide the balance of the account as of Dec 31st the previous year by life expectancy factors issued by the IRS. The factors usually hinge on your age and can be found in the IRS Uniform Lifetime Table. There are three life expectancy tables you can choose from depending on your situation. Categories include the single life expectancy, uniform lifetime table, and joint and last survivor table. You may also use an RMD calculator to figure out how much you need to withdraw from your retirement accounts each year. Alternatively, reach out to financial institutions to help with the calculation.

It’s the account owner’s role to withdraw the correct amount of RMDs, so consulting a tax advisor is ideal if you’re unsure about how to do it on your own. Individuals with multiple IRAs must calculate the RMD amount for each account. Alternatively, it’s possible to take one lump sum from a single account, as long as you meet the RMD requirement.

If you don’t have anything to do with your withdrawals, it is possible to re-invest the money in a non-tax deferred account like a basic brokerage account. You may also choose to deposit funds into a child’s 529 college savings plan or Roth IRA. For advice on how to invest your RMD payments, speak to one of our financial planners today.