There has been a lot of discussion regarding Required Minimum Distributions or RMDs. The rules have changed quite a bit since the beginning of 2020. Over the last 15 months, we have helped navigate the new rules for our clients and have discovered ways to achieve financial goals through the RMDs.
What is an RMD?
A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP IRA, or SIMPLE IRA by owners and qualified retirement plan participants of retirement age. The withdraw is a taxable income.
When do I take my RMD?
In 2020, the age for withdrawing a RMD from a retirement account changed. You must begin withdrawing from a retirement account by April 1 following the year you reach the age of 72 (prior to 2020, 70 ½ years old was the RMD age). The retiree must then withdraw the RMD amount each subsequent year based on their current RMD calculation.
Is my RMD the same if I inherit an IRA?
Some designated beneficiaries may be required to withdraw the entire account by the 10th calendar year following the year of the IRA owner’s death. Meanwhile, some non-designated beneficiaries may be required to withdraw the entire account within five years of the IRA owner’s death.
How is my RMD Calculated?
The calculation is done in three steps. First, you will need your account balance as of 12/31 of the previous year. Next, you will need the RMD factor based on your age. This can be found on irs.gov. Lastly, divide the account balance by the RMD factor number. See the below example.
A 75-year-old man with an RMD factor of 22.9 and 12/31 account balance of $500,000 is required to withdraw a RMD amount of $21,834.06. Simply divide $500,000 by 22.9 for the RMD amount of $21,834.06.
Ideas for your RMD
- Take your RMD, pay the taxes and reinvest it into your individual account.
- Use the RMD to help your monthly cash flow needs.
- Donate your RMD to a charity of your choice. If this is done correctly, you will not have to pay taxes on your distribution.
- Consult with your tax advisor
- Plan ahead with your beneficiaries to minimize the burden of the RMD when they inherit your IRA at the time of your death.