REQUIRED MINIMUM DISTRIBUTIONS

The IRS changes the 401K and IRA rules periodically, so I like to review them once a year for our followers.  In today’s post, I will be focusing on the rules for Required Minimum Distributions or RMDs.

Required Minimum Distributions (RMDs) are minimum amounts that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 72 (73 if you reach age 72 after Dec. 31, 2022). 

Required Minimum Distributions (RMDs) are an essential element to consider when planning for retirement with retirement accounts such as 401(k)s, IRAs, and other tax-advantaged savings plans. Understanding the rules surrounding RMDs is crucial to avoid penalties and make the most of your retirement savings.

You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022). The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules do not apply to Roth IRAs while the owner is alive. However, RMD rules do apply to the beneficiaries of Roth 401(k) accounts.

Account owners in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they're a 5% owner of the business sponsoring the plan.

This minimum withdrawal is based on your life expectancy and the total value of your retirement accounts. Generally, a RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in tables.

Failure to take out the required minimum distribution can result in a hefty penalty—50% of the amount you should have withdrawn but didn't. You can withdraw more than the RMD in any year.  But a withdrawal in excess of the RMD in one year cannot be applied to the following year.

It's important to plan ahead for RMDs as they can have tax implications. The rules surrounding RMDs change frequently. The withdrawn amount is generally subject to income tax, so it's essential to consider how these distributions will impact your overall tax situation in retirement.

Overall, staying informed about RMD rules and requirements is key to successfully managing your retirement savings and ensuring you make the most of your hard-earned money in your golden years. Be sure to consult with a financial professional to help you navigate the complexities of RMDs and tailor a plan that suits your individual retirement needs.

Stay Disciplined My Friends,

Phil

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