Did you know that the IRS requires you start taking withdrawals from your qualifying retirement accounts as soon as you turn 70½?
Its true, and these pesky requirements are called required minimum distributions, or RMDs. RMDs apply to qualifying retirement savings accounts including IRAs, 401Ks, 457 plans, and other tax-deferred retirement savings plans such as TSA, TSP, SEP, or SIMPLE.
RMDs are annoying, and if you use the following tips, they won’t become problematic.
- Plan For Timing – You have to start taking RMDs by April 1st of the year after you turn 70½, but that doesn’t mean that’s when you should start taking them. For example, depending on when your birthday falls, you might be responsible for taking two RMDs your first required year. Therefore it’s sometimes better to take your first RMD a year early, thus avoiding a double withdrawal and double tax charge.
- Switch to a Roth – You are not required to take RMDs from your own Roth IRA. For example, the IRS might state that you have to take RMDs from a Roth 401K, but if you move your Roth 401K into your Roth IRA when you retire, you will avoid those RMDs. Do remember, though, that RMDs are required for inherited Roth IRAs, so you children might have to start taking money out after you’re gone. Are you a little unclear about Roth IRAs and regular IRAs? Get more information here, or here.
- Check Your Plan For Working Requirements – Some plans allow you to skip RMDs if you’re still working at age 70½. Check with your particular plan.
- Figure Out How Much Your RMD Will Be – Your RMD amount is calculated based on your prior year’s December 31st account balance, and an IRS table based on your age. If math isn’t your thing, you can use online RMD calculators to give you an estimate. Don’t forget to take your spouse’s age into consideration.
- Give to Charity – You are allowed to direct your RMD to a charity and therefore skip out on reporting it as taxable income. This helps you save money on your taxes, and gives back.
- Beware of Fines – There are penalties for not taking your required minimum distributions. The penalties can be as high as a tax of 50% on any amounts that were not withdrawn in time. While RMDs are annoying, it’s much worse to be stuck with fines and penalties. You can learn more about the penalties and RMDs in general on the IRS website.
While a lot of people don’t know about required minimum distributions, they’re a pretty big part of retirement and saving. The more prepared you are for your RMDs, the more money you can save and the easier it will be for you to enjoy your retirement.
Did we miss any crucial RMD tip or information? Or do you have any questions about how RMD laws will affect you? Comment below.
