Understanding RMDs

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Understanding RMDs

Retirement plans like IRAs and 401Ks are great ways to prepare for your future and save for your life after work, but like everything when it comes to invested money, there are rules and guidelines to follow.

For retirement plans, you must follow the required minimum distribution (RMD) rules outlined by the IRS. Basically, you need to start withdrawing money from those accounts at a certain age or face penalties.

Here are the specific RMD rules that you have to follow in order to avoid incurring penalties.

Age Milestone

As mentioned above, there is an age milestone for required minimum distribution and that rule changes with the 2019 SECURE Act. There are two milestones to keep in mind for 401(k)s or Traditional IRA withdrawals.

– June 30, 1949 or before: You can take your first RMD in the year you turn 70 ½. You can delay the first RMD that year but you must take it by April 1st of the year after you turn 70 ½.

– July 1, 1949 or after: You can take your first RMD in the year you turn 72. You may delay taking your first RMD that year, but you must take it by April 1st of the year after you reach 72.

You do not need to take an RMD in that first year but if you don’t, you will need to take two RMDs in the following year. Then you will need to take the minimum RMD each year thereafter to stay within the IRS rules.

Breaking Down RMDs By the Terms

REQUIRED – Understanding RMD Requirements
There is a reason that the word “required” appears in RMDs. The required minimum distributions are 100% mandatory. If you do not take them, the IRS will likely give you a 50% penalty for the amount not distributed.

Essentially if your RMD is $4,000 and you only take out $1,000, that means you left $3,000 on the table and you could be subject to a 50% tax on that meaning that you will lose $1,500 that year due to the penalty.

MINIMUM – Know How Much You Have To Take Out
The minimum withdrawals for retirement accounts are based on life expectancy and life expectancy is calculated by the IRS. View the IRS life expectancy table.  The brokerage firm where you keep your retirement accounts has all of this information and will usually assist you with or simply advise you what your minimum amount is.

You can choose to take the full minimum amount from one account or a portion of the total from multiple accounts, and you can choose to take it out on one day or spread it out over multiple distributions during the year.

A lot of banks and investment plans will offer automated options, so you don’t have to think about making the distributions so make sure that you check with your bank or plan to find out your options.

Even if you don’t need the money for living expenses, there are no rollover options. You must take the minimum every year and you must pay the resulting tax.

Need Help Understanding RMDs?

RMDs and their required rules can get difficult to understand. We want to make sure that you are set up for success so the experts at MCK are ready to help. Reach out today!