Required Minimum Distributions
Required Minimum Distributions (RMDs) are the minimum amount that you must withdraw from certain retirement accounts each year, starting at a certain age. Here's what you need to know about RMDs:
RMDs are the minimum amount that you must withdraw from certain retirement accounts each year, starting at age 72 (or 70 1/2 if you turned 70 1/2 before January 1, 2020). The purpose of RMDs is to ensure that you withdraw a portion of your retirement savings each year and pay taxes on those withdrawals.
When They Occur
RMDs must be taken by December 31 of each year. However, you have the option of taking your first RMD by April 1 of the year following the year in which you turn 72 (or 70 1/2 if you turned 70 1/2 before January 1, 2020). If you choose to take your first RMD by April 1 of the following year, you will be required to take two RMDs that year.
How to Calculate
The amount of your RMD is calculated based on the balance in your retirement account(s) as of December 31 of the previous year, and your life expectancy. The IRS provides tables to help you calculate your RMD based on your age and account balance. Your financial institution may also provide tools to help you calculate your RMD.
Which Retirement Accounts are Subject to RMDs
RMDs are required for most tax-deferred retirement accounts, including:
- Traditional IRA
- SEP IRA
- Simple IRA
- Profit-sharing plans
- Other defined contribution plans
Roth IRAs are not subject to RMDs while the account owner is alive.
How to Avoid Losing Money Due to RMDs
RMDs can sometimes cause retirees to lose money because they are required to withdraw a certain amount, even if they don't need it for living expenses. Here are some strategies to avoid losing money due to RMDs:
Plan ahead.A If you know that you will be subject to RMDs, plan your withdrawals to minimize your tax liability.
Consider a Roth conversion. Converting traditional IRA funds to a Roth IRA can reduce the impact of RMDs, since Roth IRA withdrawals are tax-free and not subject to RMDs.
Take advantage of qualified charitable distributions (QCDs). QCDs allow you to donate up to $100,000 per year from your IRA to a qualified charity without counting the withdrawal as income or paying taxes on it.
Use RMDs to fund a life insurance policy. Using RMDs to fund a life insurance policy can help offset the tax liability of RMDs and provide a tax-free benefit to your heirs.
You will pay federal income taxes on your benefits if your combined income (50% of your benefit amount plus any other earned income) exceeds $25,000/year filing individually or $32,000/year filing jointly. You can pay the IRS directly or have taxes withheld from your payment.
Submit a request to pay taxes on your Social Security benefit throughout the year instead of paying a large bill at tax time.
In conclusion, RMDs are the minimum amount that you must withdraw from certain retirement accounts each year, starting at age 72 (or 70 1/2 if you turned 70 1/2 before January 1, 2020). RMDs are calculated based on your account balance and life expectancy, and they are required for most tax-deferred retirement accounts. To avoid losing money due to RMDs, plan ahead, consider a Roth conversion, use QCDs, or use RMDs to fund a life insurance policy.