If you reached age 70½ this year, it is time to start thinking about required minimum distributions (RMDs) from your tax-deferred retirement accounts and how they will fit into a tax-efficient retirement strategy.
The IRS generally requires taxpayers to annually withdraw money from their traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined-contribution plans by December 31 beginning in the year they turn 70½ or risk stiff penalties equal to 50 percent of the undistributed amount. Essentially, RMDs help to ensure that Uncle Sam receives his share of the income you saved and grew tax-free for most of your adult life. RMDs are treated as ordinary income that can put you in a higher tax bracket and increase the amount of tax you owe. Therefore, it is critical that you plan and prepare for these tax liabilities far in advance of your retirement.
There are exceptions to the age requirement when taxpayers are still working and in the first year they reach the age threshold. More specifically, if you turned 70 ½ this year, you may put off your first RMD until April 1st of next year, at which time you will have to take two RMDs before Dec. 31. As a result, you should prepare for the potential of significantly higher taxable income in that subsequent year.
The amount of your RMD in a given year depends on a variety of factors, including your age, life expectancy (according to the IRS’s “Uniform Lifetime Table”) and the balance in your retirement accounts at the end of the immediately preceding calendar year. If you have multiple IRAs, you must calculate the RMD for each separate account, but you may choose to withdraw a total aggregate amount from only one account. In contrast, if you have money in both an IRA and a 401(k) plan, you must take separate RMDs for each account.
In the year of your passing, you will still have an RMD requirement. For subsequent years, the RMD will depend on who you named as beneficiaries of your retirement accounts. A surviving spouse may treat the plan as his or her own and calculate RMDs based on his or her current age or the age of the original owner at the time of death. Alternatively, a surviving spouse may withdraw the entire account balance at the end of the fifth year following the account owner’s death when the owner died before the age of 70 ½.
All other non-spouse beneficiaries may either withdraw the entire account balance by the end of the fifth year following the account owner’s death, if the account owner died before taking an RMD, or they may calculate the RMD based on the beneficiary’s age at the end of the year following the year of the owner’s death. If an account owner receives RMDs before death, the beneficiary may calculate RMDs based on t his or her remaining life expectancy or that of the account owner at death, whichever is longer.
About the Author: Robert Mark Weiss, CFA, is a regional director and financial planner with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (941) 308-1120 or email firstname.lastname@example.org.
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