Under-standing Required Minimum Distributions

It is fairly common that after retirement, some individuals continue to work or have different streams of income that cover their living expenses outside of their retirement plan accounts. This causes them to have the option not to deduct funds from their retirement plans.  However, you cannot leave money in your retirement accounts indefinitely. You must remove your funds at intervals.

This is what is referred to as required minimum distributions, also known as RMDs.   

In understanding required minimum distributions, there are several factors to consider. The annual required minimum distribution is the compulsory money that you must withdraw from your retirement account each year after you reach the age of 72 years.  

During this tax planning article, you will learn the following information while gaining an understanding of required minimum distributions:

• Do RMDs apply to my retirement plan?

• When do I have to withdraw?

• How do I calculate RMDs?

Do RMDs Apply To My Retirement Plan?

When you have made contributions to certain retirement plans, you will have to make required minimum distributions as the original account holder or as a beneficiary. The retirement plans that must make withdrawals include the following:

• Traditional IRAs

• SIMPLE IRAs

• SEP IRAs

• Roth IRA beneficiaries

• 401(k) plans

• 457(b) plans

• 403(b) plans

It is important to remember that required minimum distributions are not mandatory with Roth IRAs, unless you inherit it from a person who is not your spouse.

When Do I Have to Withdraw?

The required date that individuals must make their withdrawals from their IRA retirement plan accounts is April 1st of the year following their 72nd birthday. Moreover, you may learn during tax planning that your specific retirement plan that you made contributions to requires you to receive required minimum distributions even if you are still employed after the age of 72 years.

You must withdraw your required minimum distributions by December 31st every year after your beginning date. Customarily, for the first year after the year that you reach the age of 72 years, you may have two required distribution dates. These will be on April 1st for the year you turn 72 years old, as well as another withdrawal by December 31st. 

You have the opportunity, if you do not wish to wait until April 1st of the year after you turn 72 years old, to make your first withdrawal by December 31st of the year that you turn 72.

It is critical to consider that if you do not make these required minimum distributions from your retirement plan accounts or if the distributions are late or not large enough, the IRS could charge you up to 50% in excise tax on the amount that you did not distribute.    

A pertinent question that some individuals may ask is, “What do I do with my required minimum distribution if I don’t need it for my living expenses?” You must still make the required minimum distributions. You may then utilize it in any way that you see fit, whether it is to make charitable donations or re-invest it.

How to Calculate RMDs?

When understanding required minimum distributions, you should consult a tax advisor regarding how to calculate what your withdrawals will be. You can also calculate them manually when you begin retirement.  

Your required minimum distribution amounts are determined by the fair market value of your IRAs at the end of the previous year. You must consider your life expectancy and age as factors as well. The required minimum distributions should be calculated separately for each IRA retirement plan that you have, with the exception of Roth IRAs.

The IRS provides worksheets that can assist in forecasting the amount for your required minimum distributions, including married account holders whose spouse is more than ten years younger than them or beneficiaries who are non-spouses. There is also a Uniform Lifetime Table on the IRS’ website that you can use to calculate your withdrawals and payout periods.   

A common concern during tax planning after retirement is if an individual can withdraw more than their required minimum distribution.  You are more than welcome to do so! However,it is worth noting that your withdrawals will be taxed as income. Any extras that you withdraw will not count towards the future required minimum distributions.

When understanding required minimum distributions before or after retirement, it is simply the amount of money that you must withdraw from your retirement plans that you made contributions to. You are required to begin making these withdrawals the year after you turn 72 years old.  If you would like to make the withdrawals before this first date, you can do so as well.

At the time of tax planning with your advisor, you must also be cognizant of the fact that the withdrawals made for your required minimum distributions will be viewed as regular income and will therefore be taxed as such. You can also be charged if you do not make on-time or substantial required minimum distributions.