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Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS - December 16, 2019
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Neglecting to withdraw a required minimum distribution (RMD) from an IRA by the due date brings about a painful tax code penalty: 50%. Yes, you read that right. If you are supposed to withdraw at least $4,000 and (uh oh!) did not do as such, you have to write the IRS a check for $2,000.
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 Air Products and Chemicals (APD - Free Report) , 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.
In addition to these considerations, it is essential to take into account the required minimum distribution (RMD) that applies to most retirement accounts. Basically, this is an IRS requirement that you withdraw a certain amount from your qualified retirement accounts once you reach age 70 1/2.
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.
What You Need 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 do I need to begin withdrawals? For most accounts, you should take your first distribution by April 1 of the year following the calendar year in which you arrive at age 70 1/2.
For each subsequent year after your required beginning date, you must take your RMD by December 31. Note that you do not have to take an RMD on a Roth IRA since you paid taxes prior to contributing. Other types of Roth accounts require RMDs. However, there are ways to avoid them. For example, you can roll your Roth 401(k) into your Roth IRA.
What will happen if I neglect to take my RMD? If you don't take an RMD, or don't take a large enough distribution, you are liable for a 50% tax on the amount that was not withdrawn in time.
How much cash do I need to withdraw? To figure out a particular RMD, you should divide your earlier year's December 31st retirement account balance by a "distribution period" factor dependent on your age.
Here's an example to give you an idea of the amount: Ann is 70 and will take her first RMD in the year she turns 70 1/2. Her IRA balance at the end of the prior year was $100,000. Her "distribution period" factor is 27.4. Dividing $100,000 by 27.4 equals $3,649.63. This is how much Ann is required to withdraw for the calendar year in which she turns 70 1/2.
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.
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Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS - December 16, 2019
Neglecting to withdraw a required minimum distribution (RMD) from an IRA by the due date brings about a painful tax code penalty: 50%. Yes, you read that right. If you are supposed to withdraw at least $4,000 and (uh oh!) did not do as such, you have to write the IRS a check for $2,000.
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 Air Products and Chemicals (APD - Free Report) , 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.
In addition to these considerations, it is essential to take into account the required minimum distribution (RMD) that applies to most retirement accounts. Basically, this is an IRS requirement that you withdraw a certain amount from your qualified retirement accounts once you reach age 70 1/2.
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.
What You Need 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 do I need to begin withdrawals? For most accounts, you should take your first distribution by April 1 of the year following the calendar year in which you arrive at age 70 1/2.
For each subsequent year after your required beginning date, you must take your RMD by December 31. Note that you do not have to take an RMD on a Roth IRA since you paid taxes prior to contributing. Other types of Roth accounts require RMDs. However, there are ways to avoid them. For example, you can roll your Roth 401(k) into your Roth IRA.
What will happen if I neglect to take my RMD? If you don't take an RMD, or don't take a large enough distribution, you are liable for a 50% tax on the amount that was not withdrawn in time.
How much cash do I need to withdraw? To figure out a particular RMD, you should divide your earlier year's December 31st retirement account balance by a "distribution period" factor dependent on your age.
Here's an example to give you an idea of the amount: Ann is 70 and will take her first RMD in the year she turns 70 1/2. Her IRA balance at the end of the prior year was $100,000. Her "distribution period" factor is 27.4. Dividing $100,000 by 27.4 equals $3,649.63. This is how much Ann is required to withdraw for the calendar year in which she turns 70 1/2.
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.