[VIDEO] Your Retirement and Required Minimum Distributions

What impact do Required Minimum Distributions have on your retirement? You’ve got questions….we’ve got answers. 

You’ve worked hard to build up your retirement savings, but you can’t keep money in your retirement accounts forever. However, thanks to the recent SECURE Act, if your 70th birthday is July 1, 2019 or later, you can delay taking withdrawals until you reach age 72. For each year after your required beginning date, you must withdraw your Required Minimum Distribution (or commonly referred to as RMD), by December 31. 

So, since there always seems to be questions regarding RMDs, let me take a moment and answer some of the most common ones.

Before I dive in, let me tackle one of the most common questions I receive regarding RMD’s but more specifically for THIS year – Do retirees have to take RMDs from retirement accounts in 2020?  The answer, no. All RMDs have been suspended for 2020. This waiver includes any retirement account subject to RMDs, such as IRAs, TSP’s, 401k’s, and inherited accounts. Now on this, if you are subject to RMDs, the waiver applies to you regardless of age. It includes original account owners over age 70½ (or 72, under the SECURE Act), original account owners who turned 70½ in 2019 BUT have not taken their distribution yet, AND inherited-IRA beneficiaries of any age.

Okay, so let’s look at those popular questions: 

Number 1 – Are there consequences for failing to take RMDs?

The simple answer is yes. If you are required to take distributions from your retirement accounts and do not, or if the distributions you do take are not large enough to meet the required minimum, you may have to pay a 50% penalty on the amount not distributed as required, which would be imposed by the IRS.

Question 2 – How much will you be required to take?

The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided, by a distribution period from the IRS’s Uniform Lifetime Table. A separate table is used if the sole beneficiary is the owner’s spouse who is 10 or more years younger than the owner. If an account owner fails to withdraw the full required amount, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.  

Number 3 – When exactly do you need to start taking RMDs? 

Well, let’s first look at IRAs (including SEPs and SIMPLE IRAs).  If you were born before July 1, 1949, RMDs are required April 1 of the year following the calendar year in which you reach age 70½. However, if you were born after Jun 30, 1949, you would need to take your RMDs April 1st of the year following the calendar year in which you reach age 72.

When it comes to TSP’s, 401(k)’s, 403(b)s, profit-sharing plans, or other defined contribution plans, you generally need to begin taking RMDs April 1 following the later of the calendar year in which you either reach age 72, (or age 70½ if you were born before July 1, 1949), or when you retire, and that is if your plan allows this.

And question 4 – How is an RMD taxed?

The account owner is taxed as his or her income tax rate on the amount of the withdrawn RMD. However, to the extent the RMD is a return of basis or is a qualified distribution from a Roth IRA, it is usually tax free. Additionally, RMDs cannot be rolled over into another tax-deferred account in an attempt to push back or defer the amount. One more note on this, when it comes to your RMD, you can withdraw more than the minimum, but keep in mind your withdrawals will be included in your ordinary taxable income except any part that was previously taxed or that can be received tax-free. 

As you can see, the recent SECURE Act changes are bringing up a lot of tax questions about RMDs, and we are happy to help clear up any of the confusion. When it comes to distributions or anything tax related, as always, it’s also best to speak with your tax advisor for more clarification on how it pertains to your individual situation. Finally, the IRS has put together a great resource webpage that answers these questions and more, and it can be found at the link below. If you should have any further questions, reach out to us anytime.

[1] https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions#11