With the year-end approaching, an important deadline for retirement-account owners is also coming: required minimum distributions.
A required minimum distribution (RMD) is the amount of money that you must withdraw from almost all tax-advantaged retirement accounts. Under the passage of the Secure Act in 2019, the required beginning date (RBD) was moved to age 72 from 70½, for individuals who reached age 70½ after Dec. 31, 2019, or put another way, anyone born after June 30, 1949.
The dollar amount required to be withdrawn is determined by the total amount of savings in tax-deferred retirement accounts on Dec. 31 from the previous year. This dollar amount is then divided by the IRS life expectancy table based on your current age. For example, a 75-year-old individual in 2021 had a total of $500,000 in tax-deferred savings on Dec. 31, 2020. As a result, the RMD for 2021 is $500,000 divided by 22.9 (the IRS life-expectancy factor for age 75), which equals $21,834.06.
The annual deadline for taking your RMDs is Dec. 31. You can delay taking your first RMD until April 1 of the year after you turn 72, however choosing this option means taking both your first and second RMD in the same year, which could cause you to owe more in taxes than if you took each RMD in separate years.
Once RMDs begin, you are required to take minimum distributions from your retirement plans each year, based on your account balance and IRS life expectancy tables. If you fail to take an RMD when required, or if you withdraw less than required, you will have to pay a 50% penalty on the amount you failed to withdraw.
If you have multiple 401(k) plans, the minimum distribution must be determined and withdrawn separately from each 401(k). This also applies to Roth 401(k)s. If you have multiple IRA accounts, the minimum distribution must also be determined separately for each IRA, however, unlike 401(k) accounts, you can add your IRA accounts together and take the total distribution from any one or more of your accounts.
Many investors are under the impression that RMDs must be withdrawn in one lump sum, however, there is there is no such requirement. RMDs can also be withdrawn in increments throughout the year. For example, if your RMD for the year is $12,000, you can withdraw $1,000 each month which will cover your RMD for the year. This can allow more money to remain in your account to grow and compound during the year.
As with all things involving taxes and retirement, there are different rules and life expectancy factors that apply when it comes to taking required minimum distributions (i.e., spousal versus nonspousal inherited IRAs, 401k’s and Roth IRA assets, just to name a few. If you’re unsure about the best RMD strategy for your needs, you may want to consult with your financial advisor for advice regarding your specific situation.
Martin Krikorian, is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services located at 9 Billerica Road, Chelmsford. To schedule a free no obligation portfolio review, he can be reached at 978-244-9254, or via email at, [email protected]