Required Minimum Distributions work differently depending on the type of account. How can you most effectively plan for them?
Today we’re talking through everything you need to know about RMDs so you can understand their nuances and create a plan to best address them.
Questions Answered:
At what age do you need to take an RMD?
What accounts do you have to take an RMD on?
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⏱Timestamps:⏱
0:00 Intro
2:59 At what age do you need to take out an RMD?
4:19 How much is the RMD going to be?
7:40 What accounts do you have to take an RMD on?
9:25 Basic rules
11:26 Spouse and non-spouse inherited IRAs
16:11 Extra benefit
20:07 Exceptions to the rules
23:54 Keep this in mind
25:55 Example
32:26 Outro
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Everything You Need to Know About RMDs (Required Minimum Distributions)
retirement planning is a crucial step in securing a comfortable future for ourselves. As we near retirement age, it becomes increasingly important to familiarize ourselves with the various aspects of retirement accounts and the rules associated with them. One such key element is Required Minimum Distributions (RMDs). Let’s dive into the details and understand everything you need to know about RMDs.
What are RMDs?
Required Minimum Distributions, commonly known as RMDs, are the minimum amounts that must be withdrawn from certain tax-advantaged retirement accounts each year, beginning from a specific age. RMDs ensure that individuals do not indefinitely defer their tax obligations on retirement funds.
Which accounts are subject to RMDs?
RMDs apply to most retirement accounts, including Traditional Individual Retirement Accounts (IRAs), SEP IRAs, SIMPLE IRAs, employer-sponsored retirement plans like 401(k)s, 403(b)s, and 457(b)s, as well as Roth 401(k) accounts (excluding the original Roth IRA owner).
Age for initiating RMDs
For most retirement accounts, including Traditional IRAs, SEP IRAs, and SIMPLE IRAs, individuals must begin taking RMDs once they reach age 72. However, if you were born before July 1, 1949, you fall under the previous requirement, which was age 70½. Roth IRAs, on the other hand, do not require RMDs during the account holder’s lifetime.
Calculating the RMD amount
The Internal Revenue Service (IRS) determines the RMD amount, which is calculated based on the account balance as of December 31 of the previous year and a life expectancy factor derived from IRS tables. The RMD amount can vary from year to year as it is influenced by changes in the account balance and life expectancy.
RMD deadlines
RMDs must be taken by December 31 of each year. However, the first RMD deadline can be extended until April 1 of the following year, but subsequent RMDs must be taken by December 31 each year to avoid penalties. It’s important to note that two RMDs will need to be taken in the year of the extension if the account holder delays their first RMD.
Penalties for not taking RMDs
Failure to take the full RMD amount by the deadline can result in significant penalties. The IRS imposes a 50% excise tax on any part of the required distribution that is not withdrawn on time. For example, if your RMD is $10,000 and you only withdraw $5,000, the remaining $5,000 will be subject to the 50% penalty tax.
Implications for tax planning
RMDs are generally subject to income tax, except for any portion of the distribution that represents a return of after-tax contributions. It’s important to include RMDs in your overall tax planning to ensure that the withdrawals don’t push you into a higher tax bracket.
Strategies to maximize RMDs
While RMDs cannot be avoided, there are strategies to potentially minimize their tax impact. These strategies may include evaluating your tax bracket during retirement and considering converting a portion of your Traditional IRA into a Roth IRA, which can potentially lower future RMDs and provide tax-free distributions. Consulting with a financial advisor or tax professional can be helpful in determining the best strategy based on your individual circumstances.
Understanding the ins and outs of RMDs is crucial for those approaching retirement or already in retirement. Being aware of the specific rules and deadlines associated with RMDs ensures that you can make informed decisions about your retirement plans and avoid any unnecessary penalties. As always, it is advisable to consult with a financial advisor or a tax professional to tailor solutions specific to your retirement goals and objectives.
I watched up to when you said you were done with spousal & inherited. You didn't mention anything about when a spouse is 10 or more years younger. The RMD is affected.
Hi James – Can you please do a presentation on the RMD rules for non-spousal (i.e., kids) inherited Roth Accounts? Conflicting information out there on whether or not the kids will have to take RMD’s in years 1-9 of the IRS’s 10-Year Rule for inherited Roth accounts. You mentioned leaving all of the money in a Roth account until year 10 to maximize the tax-free growth, which would mean that there are no RMD’s on a non-spousal inherited Roth account. Others say that the same RMD rules apply to inherited IRA’s and Roths. Clarification on this would be greatly appreciated. Thanks, Craig
Did I hear you correctly? You said those subject to the 10-year rule don't have to take a certain amount in each of the ten years. That's NOT correct and misleading. You must use the IRS Table 1 Single Life Expectancy for Beneficiaries to take the minimum required in each of the 10 years. You can take more, but not less each year. For each year going forward, you subtract another year from the original divisor you used the first year. I don't think the IRS has adjusted that requirement. Using this method will leave you with a pretty large lump sum to take in year 10, however,. Best to take more than the minimum. Of course, that depends on your situation.
James, Great content and you have such an excellent manner explaining complex subjects. Question, I have what I am told is a 401A plan with my Union, I do NOT/cannot contribute monies only my employer does or can contribute for the last 23 years. Is a 401A subject to RMDs? Best Regards Rich
You mentioned health saving accounts, what about asset based LTC policy? SEP Iras as spousal inherited treated same as regular IRA? Thank you!
Comprehensive information well organized and delivered, as usual. Thank you James.