After years of savings, some people have a hard time spending money in retirement. An EBRI study found that retirees with $500k or more at retirement spent less than 12% of their nest egg within the first 20 years of retirement (on a median basis). Source

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What To Know About Required Minimum Distributions

There’s no doubt the end of the year is a busy time for people, filled with holidays and gatherings. However, it’s still important to ensure you’ve withdrawn your Required Minimum Distribution (RMD) from your qualified retirement account, if applicable to you. This week’s MoneyDo is to understand the requirements and options for taking your RMD. 

What is an RMD? RMDs are mandatory annual distributions that must be withdrawn from qualified retirement accounts (such as a 401(k) or traditional IRA). These funds are generally included in your taxable income in the year withdrawn. Prior to the SECURE Act, which was enacted in 2019, RMDs began upon the attainment of age 70½. However, the SECURE Act pushed the start age back to 72 for those born after June 30th, 1949. There may also be RMDs required from an Inherited IRA, depending on when the original account owner passed away. 

Why are RMDs required? Qualified retirement accounts are designed to allow individuals to save on a pre-tax basis, deferring the tax liability until withdrawal in retirement. The IRS requires these distributions to safeguard against people using retirement accounts to avoid paying taxes on previously untaxed funds. 

How are RMDs calculated? Your RMD is calculated based on the value of your IRA or other retirement account as of 12/31 the previous year. The 12/31 value is divided by a life expectancy factor found in the IRS Uniform Lifetime Table. Your age at the end of the current year is used to determine the life expectancy factor.  

Keep in mind there’s a different IRS table used if you’re married, your spouse is the only primary beneficiary of your account, and is more than 10 years younger than you. In this case, your RMD is calculated using the 12/31 value and the IRS Joint Life Expectancy table. Both your spouse’s age at the end of the current year and your age at the end of the current year determine the life expectancy factor used if the above conditions are true.  

What are the withdrawal options for an RMD? If you own multiple IRAs, the RMDs must be calculated separately for each IRA account. However, the total RMD amount can be withdrawn from one or more of your IRAs. Conversely, RMDs from other retirement accounts, such as 401(k)s, must be calculated and withdrawn separately from each retirement account. You can withdraw more than your RMD, but that is the minimum amount that must be withdrawn. The funds can be sent to your bank account, you can transfer the funds to a taxable account to be invested, or you can send the funds to a charity. Roth conversions can’t be used to satisfy an RMD. 

Sending funds directly from your IRA to a qualifying charity is called a Qualified Charitable Distribution (QCD). Should you choose this option, there are a couple of factors to keep in mind. QCDs are only allowed from an IRA, not another qualified retirement account, like a 401(k). The account owner must be age 70½ or older to be eligible for QCDs and the maximum annual amount per account holder is $100,000. This strategy excludes the amount donated from taxable income and can be used to satisfy some or all of the RMD for those age 72 and older. 

What is the deadline for withdrawing an RMD? RMDs must generally be withdrawn by December 31st of the calendar year. There are some exceptions to the deadline if it’s your first RMD and for workplace retirement plans if you’re still working past RMD age. There’s a whopping 50% penalty for any RMD amount not withdrawn by the deadline. For example, if your RMD is $30,000 and you do not withdraw anything by the December 31st deadline, you will be subject to a $15,000 penalty. 

RMDs can be complicated and we’re here to help! Contact the Annex team today to discuss your RMD options and decide what will work best for your unique situation. 


Annex Wealth Management’s Financial Planning Team answer several Ask Annex questions:

What should I do if my RMD is more than what I need for living expenses?

If you find your RMD amount exceeds what you need to cover living expenses, you can consider transferring your RMD to a non-qualified account for re-investment rather than sitting idly in cash. Another consideration would be to use the extra cash to replenish your emergency fund. If over age 70 ½ and charitably inclined, you may wish to talk with your advisor about using a strategy called qualified charitable distributions (QCD’s). This allows you to donate directly from your IRA and may offset some or all of your RMD obligation.

Due to the markets my account value has changed significantly from last year. Should I do anything different with my RMD?

Now that we’re reaching the end of the year, you likely have less flexibility with the timing of any remaining RMD obligations– which, in most cases, simply must be taken. In future years, if you find a significant change in your qualified account value, up or down, due to market conditions, consider accelerating withdrawals by taking your RMD early, or in a larger lump sum. This will lock in gains. If applicable, spreading out/delaying withdrawals will potentially mitigate selling assets at lower share prices.

Due to the sale of a property, we are recognizing a large amount of capital gains this year. Can I use my RMD at all to help with the tax portion?

Since you’re recognizing large amounts of capital gains during this tax year, consider earmarking your RMD as a method of withholding taxes to supplement any missed and/or inadequate quarterly tax payments to avoid under-payment penalties. Talk to your tax advisor further about your individual situation.

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