Advisor Connect

Helping Participants Understand RMDs

We naturally focus on helping clients accumulate wealth, but, we understand, of course, that everyone will reach the point at which they begin to withdraw money to sustain their lifestyles beyond their working years.
 
At age 59 and a half, it' permissible to withdraw money from a qualified retirement plan or IRA without penalty and simply pay ordinary income tax on the taxable portion of the withdrawal. Most people, of course, not only work well past that age, but also postpone making such withdrawals until later in life in order to save more and give their contributions and earnings more years to grow.
 
At age 70 and a half people participating in a retirement plan or IRA come to another milestone: the age threshold for Required Minimum Distributions or RMDs for short.
 
RMDs generally work this way: Once you hit 70 and a half you need to withdraw a fraction of the value of each of your retirement accounts in either a lump sum or in installments by December 31st each year. The IRS does give a little relief until April 15th of the following year to get this done, but only for the very first year. The amount of the withdrawal is based on published mortality factors. Technically, each individual is responsible to calculate their RMDs each year because service providers may not know about all of the retirement plan accounts a person may have. Of course, we calculate the required minimum distributions for the participants in the retirement plans we service.
 
Here are a few quick facts to know:

  1. RMDs need to be calculated from all traditional IRAs, but the total annual withdrawal can be made from one or more of them. It' not necessary to withdraw money from every IRA. 
  2. People with balances in qualified retirement plans like 401ks need to take RMDs from each plan each year.
  3. It's OK to withdraw more than the minimum required amount each year, but doing so doesn't change the requirement for the following year. 
  4. It' also not permitted to take an RMD and roll that into another tax deferred account. 
  5. And, if you are wondering if there's a penalty for not making required minimum distributions  - there is - and it's pretty steep. The IRS imposes a penalty of 50% on the amount that should have been withdrawn that wasn't. And that still leaves the taxpayer with the responsibility to withdraw that amount and still pay ordinary income taxes on it, too.

There are a couple of important exceptions to the RMD rules to keep in mind:

  • Someone 70 and a half who is employed by a company with a 401K may continue to participate in that 401K without needing to make RMD's until they leave the company. This is true unless they own 5% or more of the company. If they do, the RMD rules apply at 70 and a half.
  • And while RMD rules apply to traditional IRAs, they do not apply to Roth IRAs.

As a financial advisor, you never know when questions about RMDs may come up. Don't hesitate to reach out to us for more information when you need it. We're here to help.

 

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