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Required Minimum Distributions 101

Required Minimum Distributions are always a most-asked-about topic around the office: they’re complicated, they’re woven into an equation, and they’re different for everyone. Today, we’re cracking the code on what RMDs are and how to best navigate them.

If you are approaching your seventies, required minimum distributions may be a part of your retirement. You may soon have to take RMDs, as they are called, from one or more of your retirement accounts. 

You can now take some RMDs a bit later in life, which is good.

Recent rule changes give your invested savings a little more time to potentially grow in your retirement savings vehicles before that first required drawdown.   

What account types require Required Minimum Distributions?

Any retirement plan sponsored by an employer, plus traditional Individual Retirement Arrangements (IRAs) and IRA-based retirement plans, such as SIMPLE IRAs and Simplified Employee Pension plans (SEPs). Original owners of Roth IRAs do not have to take RMDs.

You can take your initial RMD from a retirement plan by December of the calendar year in which you turn 72. You actually have the choice of taking that first annual RMD as late as April 1 of the following year, i.e., the year in which you will turn 73, but you’ll have to take your second RMD by December of that same year.

So if you wait 16 months to take your first RMD, you will end up taking both your first and second RMDs from that account in the same year – and since each RMD represents taxable income, that could lead to a higher-than-anticipated tax bill for that year.

Related: Roth IRA Versus Traditional IRA

How are RMDs calculated?

The Internal Revenue Service provides calculation formulas in Publication 590-B. Commonly, you calculate your yearly RMD by dividing the balance of your retirement account on December 31 of the previous year by a life expectancy factor, a number you take from tables published within Publication 590-B.

If you have multiple retirement accounts (as many of us do), each one will require an annual RMD calculation. If you own multiple traditional IRAs, you have the choice to calculate RMDs for each of those IRAs and take the combined RMD amounts for all three IRAs from just one of those IRAs. You have the same choice if you have multiple 403(b) plan accounts.

How do you avoid penalties with Required Minimum Distributions?

The most important thing to do is to take them by the annual December deadline. The second most important thing to do is to withdraw the right amount. 

If you take an RMD after the December deadline or withdraw less than you should, a penalty may apply. The I.R.S. may levy as much as a 50% tax on the amount not withdrawn. 

At West Advisory Group, we work with our clients to update their upcoming RMDs well in advance of annual deadlines. And their RMDs are calculated by us, no calculator needed.

However, it does take time to authorize and execute the RMD, so starting the process earlier is better.

Look at how the Required Minimum Distributions income may affect your taxes.

There are ways to manage the tax impact of RMDs, and you can explore those choices with your tax professional. We covered some of our most asked questions about taxes in our article here.

If you have questions about specific details and how to best navigate your required minimum distributions, I would love to answer them for you. Give our office a call and we can schedule some time together.