After years spent saving for retirement and allocating non-taxed dollars into your retirement savings, the time will inevitably come when you have to pay tax on that money. Although account owners are allowed to begin taking distributions penalty-free at age 59½, they are not yet required to take any money out of their accounts. All of this changes once you turn 72, the age at which you become subject to required minimum distributions (RMDs).
A required minimum distribution is the minimum amount you must withdraw from your retirement account each year in order to satisfy IRS requirements. This ensures that the account holder pays income tax on his or her retirement savings during his or her life. Although retirees over the age of 59½ can withdraw more than the required minimum amount each year, these excess withdrawals cannot rollover and count toward required distributions in future years, as each RMD is calculated using the account value from the previous year. RMDs do not need to be taken in one withdrawal; retirees may take any number of withdrawals throughout the year, as long as the total amount meets the required minimum.
RMD rules apply to all employer-sponsored retirement plans and to most IRAs. The one exception is that RMD rules do not apply to Roth IRAs while the original owner is alive. If account holders fail to withdraw an RMD each year, they will incur a harsh 50 percent tax penalty on the amount that should have been withdrawn from the account, in addition to regular income tax.
Your first RMD must be taken by April 1 of the year after you turn 70 ½ and any subsequent RMDs must be taken by December 31 of each year.
As RMD amounts will vary based on your individual factors, each individual will have a different RMD. An RMD is calculated by dividing the balance of the value of your retirement account at the end of the previous year (December 31) by a life expectancy factor that the IRS determines. You can find your determined life expectancy in the IRS’s Publication 590-B. You will use a different table within the publication to find your life expectancy based on various factors, such as if your spouse is more than 10 years younger than you and is also the sole beneficiary of your retirement account or if you are the beneficiary of an account.
Those with employer-sponsored retirement accounts will need to calculate and take an RMD from each account, but those who own multiple IRAs have different options. You may calculate the RMD separately for each account, but then withdraw the total amount from just one or a few accounts. This can prove useful, as you could take the total RMD from the lowest-performing account to minimize the effect of taxes on the other accounts and potentially maximize the total income you will receive over the course of your retirement. Although you may ask the custodian of your account or your plan administrator to calculate your RMD, it is ultimately up to you to ensure that you calculate and withdraw an accurate RMD.
Each distribution you take from a retirement account will be taxed at your federal income tax rate (with the exception of qualified distributions from a Roth IRA). State taxes may also apply, depending on your state of residence. If you make a nondeductible contribution to your IRA, for example if you exceeded the income limits for deduction, your distributions will not be taxed, as you have already paid tax on the money when you made the contribution.
Keep in mind that if you wait until April 1 of the year after you turn 70½ (the last possible date you can take your RMD without incurring the penalty), you will also have to take another RMD by December 31 of that year. Taking two RMDs in the same year can really up your income, and depending on the amount of withdrawal, could potentially push you into a higher tax bracket for that year. It’s important to consider this before determining when you will take your first RMD.
For every rule, there are some exceptions. If you have a special circumstance, there may be certain RMD rules that will have different effects on you. Be aware of the following:
This article was written by Advicent Solutions, an entity unrelated to Prudential. ©2021 Advicent Solutions. All rights reserved.
White Rose Wealth Management
Peter Kelly
White Rose Wealth Management is not an affiliate of Prudential Financial. Pete Kelly sells insurance products of Prudential Financial's affiliated insurance companies in addition to products of non-affiliated insurance companies. White Rose Wealth Management and its representatives do not render tax or legal advice. Please consult with your own advisors regarding your particular situation.
Peter Kelly offers financial planning, Aaron Trinh offers investment advisory services through Pruco Securities, LLC(Pruco), under the marketing name Prudential Financial Planning Services (PFPS), pursuant to separate client agreement. offering insurance and securities products and services as a registered representative of Pruco and an agent of issuing insurance companies. 1-800-778-2255.
White Rose Wealth Management, LLC is not affiliated with The Prudential Insurance Company of America and its affiliates, including Pruco. Other products and services may be offered through a non-Pruco entity. Peter Kelly, Aaron Trinh, nor White Rose Wealth Management, LLC do not render tax or legal advice. You should consult with your own advisors regarding your particular situation.
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