What is a RMD?

When you hit the age of 72 , you are required by the IRS to withdraw funds from your traditional individual retirement accounts (IRAs) and qualified plans such as 401(k)s. This mandated withdrawal is known as a Required Minimum Distribution, or RMD.

One of the possible benefits of having an IRA is that the money you contribute is not counted as income in the year you contributed – meaning you don’t have to pay income tax on it. The government does this to encourage people to save for their retirement.

But at the age of 72, the government requires you to take money out so they can begin to collect taxes on it (no such thing as a free lunch!). If you’re in a position where you have other sources of retirement income, it may make sense to only take the minimum distribution, that way more of your money can continue to grow tax deferred. For those approaching the distribution age, it’s important to have a well-thought out distribution strategy so you don’t end up wasting a valuable tax-deferral opportunity.

How to Calculate your RMD

In most cases, to calculate your RMD you’ll need to divide your year-end retirement account value for the previous year by the correct distribution factor from the IRS Uniform Lifetime Table. The Uniform Lifetime Table assumes a few factors: the life expectancy of the retirement account owner, and that the beneficiary is 10 years younger. If your spouse is your sole beneficiary, and is more than 10 years younger than you, you will use the Joint Life and Last Survivor Expectancy table instead – both charts can be found in IRS publication 590.

RMD Formula

Use the following table and formula to calculate your RMD: 

Multiple IRAs

If you have multiple traditional IRAs, you must determine the required minimum distribution for each account. However, you do not necessarily have to take the separate amounts from each account. Instead, you may total the minimum distributions and take that total amount from any one or more of your IRA accounts.

Employer Retirement Plans

If you must take RMDs from your employer plans though, the technique mentioned in the previous paragraph does not apply. For employer plans you are not able to aggregate your RMDs, but rather must take a separately calculated RMD from each plan. If you are still currently working for an employer, you are not required to take an RMD from their plan so long as you do not own 5% or more of the company.

Beneficiary RMDs

Spouse beneficiaries may choose whether to roll the assets into their own IRA immediately, roll the assets later, or leave the assets in a beneficiary IRA. Before making this decision, the beneficiary should contact their financial advisor, as there are advantages and disadvantages to each option, depending on investment options, fees, withdrawal options, tax treatment, etc.

As with all investment opportunities, we highly advise you to speak with your financial advisor before taking your RMDs, as there may be planning opportunities that you may not be aware of. At Walsh & Associates, a financial advisor located in Sarasota, FL, we get great satisfaction out of helping our clients strategize to get the most out of their finances. If you need RMD or any other financial guidance, we encourage you to give us a call, we would love to help. 

Source: IRS.gov

More detailed information on Required Minimum Distributions can be found at IRS.gov. Please visit https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets for additional RMD resources.