By Kristi De Rycke, Registered Assistant
What is an RMD? RMD stands for required minimum distribution. This is the amount that you are required to take out of your retirement accounts every year once you have reached RMD age. Uncle Sam allowed you to grow that money tax deferred to assist you in retirement, but you cannot do that forever.
When do I have to start taking out RMDs? This is a very good question and used to be by April of the year after you turned 70 ½. The SECURE act, which was signed in December of 2019, now moved the first RMD to the year you turn 72. Did you turn 70 ½ in 2019 or earlier? Does this mean you can skip a year for paying RMDs? Sorry, no it does not. If you turned 70 ½ before or during 2019 you must go by the old rules. You need to take out your first RMD by April 1st of the year after you turned 70 ½ and the second RMD by December the year after you turned 70 ½. However, if you turn 70 ½ on or after 1/1/2020 you can delay your 1st RMD now until the April after you turn 72 and the 2nd RMD by December of the year after you turn 72.
How do I know how much I have to take out of my IRAs, 401ks and other retirement accounts? The government sets this amount. They have a calculated amount based on your IRA/401k totals on December 31 of the year before and your age at the end of the current year that the RMD is required. Then the government attaches a percentage based on your age. The percentage increases the older you get. You can go online and do the calculations yourself or work with your financial professional.
Can I take out more than the required minimum distribution? Of course you can. It is your money. Consult your financial advisor and/or tax professional to determine what the right amount is for you.
Do I have to take my RMD out of each separate retirement account? Yes AND No! So, if you have IRAs you can total up the value on December 31 of the previous year and take the RMD out of just one of the accounts. However, if you have a 401k or 457b you must take the RMD out of each specific account.
Will the RMD affect my Medicare or Social Security benefit? Possibly… You pay premiums for Medicare Part B (doctor’s visits) and Part D (medications). High income individuals are required to pay a surcharge. In 2021, high income is defined as income over $88,000 for individuals and $176,000 for married couples per Medicare.gov. The surcharge increases the higher your income is and can be deducted from your Social Security which will reduce your Social Security benefit.
Am I taxed on the RMD? Yes. The money in a traditional IRA/401k/457B decreased your income on paper the year that you did the contributions. It then grows tax-deferred until you take it out, but you typically pay ordinary income taxes when you take it.
What if I don’t need the money from my retirement accounts on a given year? Short answer…. too bad. Uncle Sam made the agreement that you could grow your accounts tax-deferred to help with retirement, but it is now time to pay the piper. Keep in mind they do call them “required” minimum distributions not “suggested” minimum distributions. However, you have options. If you must take out the RMD and do not have a current need, you can open an individual or joint taxable account either on your own or with a financial planner and still invest in stocks, bonds, REITs or whatever you choose. You will just get a statement on earnings at the end of the year that you will have to figure in with your taxes as it is now a taxable account. You could also consider using your RMDs as your charitable giving to minimize taxes. The CARES act in 2020 waived the RMD requirements just for that year.
What happens if I forget to take out the RMD or decide not to? Short answer…not a good idea! Long answer, you will be penalized 50% of the amount that should have been taken out as a punishment for not completing it. There is a form that you can fill out and file if you forget and often Uncle Sam will work with you. This comes better if you initiate it versus the government finding it. In other words, the “seek forgiveness not permission” does not apply here.
Well, there you have it, the answers to 9 most common questions regarding RMDs. If you have any further questions reach out to a trusted financial advisor.
By Greg Johnson
Required Minimum Distributions can really become a challenge if you have not consolidated your pre-tax accounts like IRA, 401k, or 457 plans. Kristi has hit the details on the head and RMD planning becomes a big part of your retirement distribution planning. Understanding what to do with the money if you need it or don’t need it can really make a difference on your tax filings. I would strongly suggest you put together your plan for taking RMD’s prior to starting.