An RMD is something we eventually have to consider. Saving and investing money into a pre-tax retirement account is a great way to save for the future. It also allows you to lower your tax liability every year that you contribute, making pre-tax retirement accounts one of the most popular ways people sock away money for their future. Eventually, the IRS wants their tax money; this is where Required Minimum Distributions (RMDs) come into play. As we approach the end of the calendar year, we wanted to go over the rules surrounding RMDs.
What are Required Minimum Distribution’s (RMD’s)?
Required minimum distributions are withdrawals that must be taken from all pre-tax retirement accounts when you reach a certain age.
What accounts are subject to RMDs?
Any pre-tax retirement account is subject to an RMD. This includes:
-Traditional IRAs
– 401K’s
– 403B’s
– Simple IRAs
– SEP IRAs
– Profit-Sharing Plans
At what age do you need to start taking RMDs?
You must take your first RMD by April 1st, the year after you turn 72 1/2. Following your first year, you must take the withdrawal each year by December 31st of that year.
*If you are still working after age 72, some 401K plans allow you to delay taking your RMD. Make sure you check with your plan manager before deciding to do so.
How are RMDs calculated?
The IRS uses its uniform lifetime table to calculate each year’s RMD. Your custodian should figure out your RMD yearly, so don’t worry about doing the math. To figure out your RMD, the IRS looks at your account balance at the end of the calendar year. That is the value they use to calculate the following year’s RMD. The IRS can change the life expectancy factor at any time. Currently, a 72-year-old would use 27.4 as their life expectancy factor.
Here is an example of how an RMD is calculated:
Account value as of December 31st: $100,000
Age: 72
Life expectancy factor: 27.4
Use simple math… $100,000 divided by 27.4 = $27,400 RMD for the year
*You can see the full uniform lifetime table from the IRS here…https://www.irahelp.com/slottreport/new-2022-irs-life-expectancy-tables-available-here
Do I need to take an RMD from every pre-tax retirement account I have?
No, an actual distribution from each account is not required. However, you must factor in the value of all your pre-tax retirement accounts when taking your RMD. You can take the distribution from any pre-tax retirement account as long as you account for all the money subject to required minimum distributions.
In what form can I take my RMD?
Your RMD can be processed in cash or securities. If you own a stock or fund you do not want to sell, you can transfer enough of that position to a taxable account or ROTH IRA. This will satisfy your RMD in the eyes of the IRS.
How are RMDs taxed?
All RMDs are taxed at ordinary income levels. The amount of your RMD is simply added to your adjusted gross income for the year.
What happens if I don’t take my RMD for the year?
Any amount of your RMD you failed to take will be subject to a 50% tax. This is why it’s essential to ensure you have satisfied your RMDs before 12/31/22. There is still time to process your distribution and avoid the 50% penalty.
The above covers most questions you may have when it comes to RMDs. Of course, like anything with the IRS, there are some caveats and situations where the rules differ. Anytime it comes to taxes, it’s best to consult your accountant. Custodians are reliable in figuring out your RMD, but like everything in life, the responsibility will always fall on your shoulders. One last thing to keep in mind… Doing ROTH Conversions before you reach age 72 will help minimize your RMDs and give you more control of your income level in retirement. If you want more info on ROTH Conversions, read our blog post from last month… ROTH Conversion Explained