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3 Investing Facts About Required Minimum Distributions You Need to Know - December 19, 2019
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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.
In case you're like most investors, you're probably trying to build a financial portfolio that is solid enough to guarantee a comfortable retirement. Among retirement financial planners, this is known as the "accumulation phase." In this stage, your objective is to carefully invest by selecting stocks with long-term potential for your retirement nest egg. For example, you might choose Citigroup (C - Free Report) , which is 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.
Planning for the distribution phase is the time where you may make decisions about where you'll want to live in retirement, whether you'll want to travel, hobbies you may pursue, and other decisions that will affect your retirement spending.
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.
Why does the IRS requires you to start taking your money out? It's simple - they want to make sure they get their tax. If this rule didn't exist, people could live off other income and never pay tax on their retirement investment gains. Then, that money could be left to family or friends as an inheritance without the IRS collecting any taxes from you.
Key Facts to Know About RMDs
What types of retirement accounts have RMDs? Qualified retirement accounts such as 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.
Every year after your start date, you are required to take your RMD by December 31. Remember, for Roth IRAs you do not have to take an RMD because you paid taxes before contributing. However, other types of Roth accounts do require RMDs, but you may be able to avoid them (for instance, by rolling 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.
Example: Ann is 70 and must take her first RMD in the year she reaches age 70 1/2. 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 of the RMD that Ann must 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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3 Investing Facts About Required Minimum Distributions You Need to Know - December 19, 2019
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.
In case you're like most investors, you're probably trying to build a financial portfolio that is solid enough to guarantee a comfortable retirement. Among retirement financial planners, this is known as the "accumulation phase." In this stage, your objective is to carefully invest by selecting stocks with long-term potential for your retirement nest egg. For example, you might choose Citigroup (C - Free Report) , which is 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.
Planning for the distribution phase is the time where you may make decisions about where you'll want to live in retirement, whether you'll want to travel, hobbies you may pursue, and other decisions that will affect your retirement spending.
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.
Why does the IRS requires you to start taking your money out? It's simple - they want to make sure they get their tax. If this rule didn't exist, people could live off other income and never pay tax on their retirement investment gains. Then, that money could be left to family or friends as an inheritance without the IRS collecting any taxes from you.
Key Facts to Know About RMDs
What types of retirement accounts have RMDs? Qualified retirement accounts such as 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.
Every year after your start date, you are required to take your RMD by December 31. Remember, for Roth IRAs you do not have to take an RMD because you paid taxes before contributing. However, other types of Roth accounts do require RMDs, but you may be able to avoid them (for instance, by rolling 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.
Example: Ann is 70 and must take her first RMD in the year she reaches age 70 1/2. 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 of the RMD that Ann must 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.