3 Investing Facts About Required Minimum Distributions You Need to Know - June 25, 2020

If you do not make a required minimum distribution (RMD) from your own or an inherited IRA by the specified deadline, the IRS could hit you with a big penalty - 50%! For example, if you were required to withdraw a minimum of $4,000 and you did not, you would be obliged to pay $2,000. Plus, beginning January 1, 2020, the rules concerning RMDs were updated.

Like many investors, you're likely aiming to build a comfortable nest egg to ensure a comfortable retirement. Among retirement financial planners, this is called the "accumulation phase." In this phase, your goal is to invest wisely by choosing stocks with long-term potential for your retirement portfolio, such as Altria (MO), a current top ranked dividend stock.

There is also a second phase of retirement planning that gets less focus - despite the fact that it's the more interesting part. It's the "distribution phase," which essentially means spending the wealth you've worked hard to amass.

Making plans for the distribution stage involves deciding where you'll live in retirement, whether you'll travel, your proposed leisure activities, and more decisions that will affect your spending during your golden years.

Along with those choices, you need to be mindful of the RMD, because it applies to the majority of retirement accounts. This IRS rule requires you to withdraw a specific minimum amount from any qualified accounts you have when you reach a certain age--previously it was 70 1/2, but beginning in 2020, it is 72.

What is the point of this mandatory withdrawal by the IRS? Not surprisingly, it's to be sure that the government gets their tax money. Without the RMD requirement, individuals could live off other income and never pay tax on retirement account gains. That cash could be left to family or friends as an inheritance and the IRS would not receive taxes from it.

The Most Important Things to Know About RMDs

Which types of retirement accounts have RMDs? Qualified retirement accounts like IRA accounts, 401(k)s, 457 plans and other tax-deferred retirement savings plans like a TSP, 403(b), TSA, SEP, or SIMPLE IRA plan require withdrawals in retirement.

When does it become necessary to begin taking distributions? Your first distribution must be taken by April 1 of the year following the calendar year that you turn 72 (for most accounts). Also, if you retire after that age, you must take your first RMD from your 401(k), profit-sharing, 403(b), or other defined contribution plan by April 1 of the year after the calendar year in which you retire.

For each year after your required starting date, you must take your RMD by December 31. Note that you don't need to take an RMD on a Roth IRA since you covered taxes before contributing. Other varieties of Roth accounts require RMDs. But, there are approaches to avoid them - for instance, you can roll your Roth 401(k) into your Roth IRA.

What happens if don't take my RMD? The penalty for not taking a required minimum distribution, or if the distribution is not large enough, is a 50% tax on the amount not withdrawn in time.

How much cash do I need to withdraw? The RMD you are required to take is calculated by dividing your previous year's December 31st retirement account balance by a "distribution period" factor dependent on your age.

Example: Ann is 71 and must take her first RMD in the year following the year she reaches age 72. Her year-end IRA balance the prior year was $100,000. Her "distribution period" factor is 27.4. The result of dividing $100,000 by 27.4 is $3,649.63 - the amount that Ann must withdraw for her first RMD.

Learning about the "distribution phase" is just one aspect of preparing for your nest egg years.

To learn more about the tax implications of retirement spending - and much more about retirement planning - download our free guide: Retirement Made Easy.

You'll find useful, detailed steps to help you navigate both the accumulation and distribution phases of retirement planning. Get Your FREE Guide Now
 
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