As the end of the year quickly approaches, you may see reminders about Required Minimum Distributions. You may be wondering what it is, how it is calculated and does it apply to you? Here is a quick overview of Required Minimum Distributions, also known as an RMD.
What is a Required Minimum Distribution (RMD)?
Once retired, many people will try to withdraw as little money as necessary (or not at all) from from their tax-deferred retirement plans such as IRAs and 401(k)s; they do this in order to give their investments more time to grow. However, once you reach age 70½, the Internal Revenue Service (IRS) generally requires you to begin taking a required minimum distribution (RMD) from these accounts each year, whether you need the money or not, because this distribution counts towards your taxable income.
Does the Required Minimum Distribution Rule apply to you?
Required Minimum Distributions start the calendar year someone turns age 70½. These Required Minimum Distributions apply to Tax-Deferred Retirement Accounts, such as an IRA, 401(k), 403(b), etc. They also apply if you have inherited an IRA and it is titled as a Beneficiary IRA account. These are the general guidelines but there are other rules that may apply, so be sure to check with your Tax Advisor or Financial Advisor to see if you need to take an RMD. You may also consult the IRS website here.
How is an RMD calculated?
The IRS decides how much you are required to withdrawal based on your age and the 12/31 value of your account at the end of the previous year. Many custodians will calculate this number for you, but if they do not then you can calculate it on the IRS website here.
What happens if I missed an RMD?
If you do not satisfy your RMD then you may face a penalty equal to 50% of the required amount that was not withdrawn. This is why it is so important to make sure you are aware if this rule applies to you and make sure if it does that you withdraw it prior to 12/31.
What if I do not need the RMD money?
Many people are required to take distributions but do not need the money. Something we help many clients do is reinvest the RMD money into a Taxable Investment Account. The money would be distributed to your bank and then put into your Taxable Investment Account. You may do this with all or a portion of your RMD money if you desire. This way the money can keep being invested until you really need it.
We are here to help
The good news is if your account is with us, we keep track of our client's Required Minimum Distributions and verify they are satisfied before the deadline. If you do have any questions about Required Minimum Distributions please contact us and our support team will help you with any information you need. You may email us at firstname.lastname@example.org or call us at 262-505-5740.
*These are the general guidelines but there are other rules that may apply, so be sure to check with your Tax Advisor or Financial Advisor to see if you need to take an RMD. You may also consult the IRS website here.