The new year is almost here! This is your official reminder: it’s time to take your required minimum distributions before year end!
Before you do, though, we recommend getting a better understanding of RMDs to avoid unplanned penalties and minimize taxes.
What is an RMD?
An RMD is the minimum amount of money that must be withdrawn from a retirement plan starting at age 70.5.
These retirement plans include traditional IRAs, SEP IRAs, Simple IRAs, SARSEPs, 401(k)s, 403(b)s, 457 plans, and Roth 410(k)s while the owner is living. RMDs are however not required for Roth IRAs.
When do RMDs begin?
RMDs must begin at age 70.5. This means you can take your first RMD anytime between the day you turn 70.5 and April 1st of the following year. However, if you don’t take your first RMD by April 1st, you will have to pay a penalty of 50% of the RMD amount.
All subsequent RMDs must be taken by December 31st of each year. Delaying the first payment until April 1st will require the account holder to make two distributions in one year. This could potentially push them into a high tax bracket. Therefore, it would be best to contact us to help you determine the most beneficial time to take your RMDs!
How are RMDs calculated?
The calculation is relatively simple – the account balance as of December 31st is divided by the life expectancy of the owner according to tables provided by the IRS.
Let’s consider an example:
John is 70.5 this year. His account balance is $150,000 as of December 31st of that year. According to the IRS Table, his life expectancy is 27.4. His first RMD would be approximately $5,475. It is up to John, as the account owner, to ensure that the correct amount is withdrawn.
Each retirement account must be calculated individually; however, you can take your total RMD amount from either one or a combination of accounts.
It’s vital to note that these are not the only factors to consider when it comes to RMDs. Much more is involved to prevent unexpected payments and penalties and to ensure a comfortable retirement for you and your family. With this in mind, consider working with Alfano & Company to develop a tax plan. We can help you compute and determine when to take your RMDs, as well as with any other questions you may have!