\Most retired folks know that IRS rules require owners of retirement accounts to take distribution when they reach a certain age. It’s called the Required Minimum Distribution or RMD. But sometimes people get some of the details wrong. So here are a few things to remember about RMDs
The Rules Changed
IRA required distribution rules are part of the IRS tax code, so from time to time the rules change.
- The 2019 SECURE Act raised the age at with required distributions start to 72. People who were making required distributions as of January 2019 need to keep making distributions.
- The 2020 CARES Act suspended all IRA distributions for calendar year 2020.
- IRS distribution tables have been updated, so be sure you are using the correct data. AARP has an RMD Calculator at this LINK.
Getting the RMD wrong can sting
If you don’t take out the required amount by the deadline, the penalty is 50 percent of the amount you should have withdrawn. That’s on top of the required distribution and state and federal income tax. Your IRA could take a heck of a wallop if you make this simple mistake.
It’s not just IRAs that apply. RMD rules apply to these types of retirement accounts:
- 401(k) plans
- 403(b) plans
- Profit sharing plans
- 457(b) plans
- Traditional IRAs
- SEP IRAs
- SIMPLE IRA
- Most company-sponsored retirement savings plans.
You do not have to take a distribution from your Roth IRA — ever.
Inherited accounts are different
If you inherit an IRA, and the deceased owner of the IRA had started taking required distributions before death, then you most likely need to take distributions. A detailed IRS chart is here. But generally,
- Spouses can take distributions based on the spouse’s life expectancy.
- Non-spouse beneficiaries need to empty the IRA by the end of the 10th year after the year the original owner dies. If the original owner dies after 2019.
- Inherited Roth IRAs are subject to standard RMD rules and penalties.
The first distribution from your IRA must come the year you turn 72
Get the amount right
To calculate your required distribution for each year, you start with the account balance as of December 31 of the prior year. You divide that amount by the factor on the Uniform Lifetime table. If your beneficiary is your spouse and your spouse is ten years or more younger than you, you will use a different table. Then, you will find these materials helpful:
- worksheets to calculate the required amount
- tables to calculate the RMD during the participant or IRA owner’s life:
- Uniform Lifetime Table -for all unmarried IRA owners calculating their own withdrawals, married owners whose spouses aren’t more than 10 years younger, and married owners whose spouses aren’t the sole beneficiaries of their IRAs
- Table I (Single Life Expectancy) is used for beneficiaries who are not the spouse of the IRA owner
- Table II (Joint Life and Last Survivor Expectancy) is used for owners whose spouses are more than 10 years younger and are the IRA’s sole beneficiaries
Consult your Certified Financial Planner™ professional for the details of your situation. If you would like to talk with me about your options and best strategies, I’m happy to do that. Follow this LINK to find a time for us to talk that works for you.
Remember that 401(k)s are different
I generally advise that clients roll 401(k) accounts over into IRAs at retirement for several reasons. But if you still have money in a 401(k) at age 70, the way you make required distributions is different.
With IRAs, you can total all the IRAs together and make a distribution from one account to satisfy the minimum.
With 401(k)s, you must take a distribution from every account separately.
Don’t forget to take distributions from Roth 401(k)s
Even though you don’t have to take RMDs from Roth IRAs, you must take them from Roth 401(k)s. The withdrawals from the Roth 401(k)s won’t be taxable, but you still need to take out the required amount each year (unless you’re still working for that employer).
The rules are different if you’re working
As long as you don’t own more than 5 percent of the company, you usually don’t have to take RMDs from your current employer’s 401(k) while you’re still employed. But you do need to take RMDs from previous employers’ 401(k)s and from your traditional IRAs at 72, even if you’re working.
You can’t avoid your RMD by converting your IRA to a Roth IRA
When you convert a traditional IRA to a Roth IRA you must pay tax on all the money converted. But the required distribution is actually based on balances in the past. So, the RMD is still required. The RMD money needs to leave the IRA environment. The balance can be converted and go forward as a Roth IRA.
Don’t mess up a tax-free transfer from the IRA to charity
After you turn 72, you can give up to $100,000 tax-free from your traditional IRA to charity each year. The gift counts as your RMD but isn’t included in your adjusted gross income —giving you a chance to receive a tax benefit for your charitable gift, even if you don’t itemize. But you can’t make a tax-free transfer and take the charitable deduction for the same money.
However, you must transfer the money directly from your IRA to the charity for it to stay out of your Adjusted Gross Income (AGI) on your tax return. So do not withdraw the money first and then write a check to the charity. The procedures to make the transfer vary by IRA custodian, so check with your CFP® professional for the details of your situation.
Don’t forget your investment allocation
Some IRA or 401(k) administrators automatically take the RMD money pro rata from each of your investments unless you specify otherwise. This might not be the best idea for your situation. If you are working with a CFP® professional, they will make sure that your account has cash on hand when you need to make your annual distribution and that the rest of your investments are positioned to best meet your financial goals.
Every situation is different, so it pays to work with your own advisor. But if you want to do some leg work on your own, the IRS has a great set of frequently asked questions here.
I’m a big believer in the value of professional advice. With a 50 percent penalty, it’s cheap insurance to consult with your own financial planner to get your situation right. I suggest you set a meeting with a CERTIFIED FINANCIAL PLANNER™ professional.
If you meet with a planner who is always an advocate for the client– a fiduciary advisor – and only works for the client – a fee-only advisor – you can be confident that the financial advice you get is focused on your best interests and is a good fit for your complete situation.
CFP® professionals take a multi-faceted approach to your financial planning process that includes budgets, risk protection, retirement planning, investment management, taxes and estate planning. All these related aspects of your financial life are what really matter when it comes to reaching your goals.
A CFP® professional can help you create a financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared in the event that you have to leave work earlier than you expected.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.