Understanding required minimum distributions can help you avoid expensive mistakes with your retirement funds.
There is a lot to think about in retirement.
When you no longer work and have a paycheck, the money in the nest egg is your money.
How you manage this money is important.
No, it is essential.
According to a recent CNBC article titled “These tips can help retirees make required minimum distributions easy and tax penalty free,” wisely managing your retirement plan distributions is key.
If you have a traditional IRA, you have required minimum distributions (RMDs) each year after you turn 72 beginning in tax years after 2019.
This change in the RMD beginning date, which was formerly age 70.5, becomes effective tomorrow, January 1, 202o, as part of the recently passed SECURE Act.
How much needs to be taken out each year?
That depends on the year, your age, and the amount of money in the account on December 31 of the previous year.
You cannot pretend these RMDs and the necessity to withdraw them do not exist.
Neglecting these withdrawals can be costly in excise taxes.
Like how costly?
What would you think about a 50% penalty tax on the amount you should have taken but failed to take?
What should you do to avoid penalties?
You need to know the amount in your account to know how much to withdraw.
This is more complicated, if you have more than one account.
Take inventory now.
Make the right withdrawals.
Do you have multiple IRAs?
If yes, you can take the money from any of these traditional accounts because of the aggregation rule.
The amount of the RMD must be calculated based on the value of all of the accounts added together.
If you have multiple 403(b) accounts, the same rule applies.
However, 401(k)s are different.
The specific distribution must be taken from its own account.
Understand the rules.
If you are still working at age 72, you may have a break from your RMDs.
For example, 401(k)s allow you to delay withdrawals until you retire if you are currently employed with the company.
Any other 401(k)s from previous employers will require withdrawals.
Remember any inherited accounts.
Did you inherit a retirement account?
If it was from your spouse, you may not owe any RMDs.
A surviving spouse may be able to “rollover” an inherited IRA to her own IRA and thereby postpone the distributions, if she is not yet age 72.
If the IRA was not inherited from a spouse, you will need to begin taking RMDs.
By the way, the SECURE Act has ended the practice of “stretch IRAs” and has limited RMDs to 10 years.
Do not forget your Roth IRA.
These RMDs are typically tax free when inherited.
The penalty is a costly 50 percent if you do not take out the money.
This is wasteful.
As we have seen above, most RMDs are taxable.
However, depending on your age and other requirements, you can eliminate taxes on up to $100,000 in RMDs by directing all or part of your RMD directly to charity.
With all of the changes brought by the SECURE Act, be sure to schedule a face-to-face consultation with your financial advisor as one of your top resolutions for 2020.
Reference: CNBC (November 29, 2019) “These tips can help retirees make required minimum distributions easy and tax penalty free”