Required minimum distributions (RMDs) can be confusing, even for clients already taking them. Let’s walk through what they are, how they work, and how we can help you handle them.

Essentially, the IRS requires seniors to take money out of their retirement account each year. In their words: You cannot keep funds in your retirement account indefinitely. 

So, when you reach a certain age, you must begin making withdrawals from any non-Roth retirement accounts you have, including 401(k)s, 403(b)s, IRAs, SEP IRAs, and so on. 

If you’re already taking distributions from your retirement accounts as income, and the amount is higher than your required minimum distribution, you don’t need to withdraw anything additional. The goal is to make sure you withdraw at least the minimum.

Calculating RMDs

We handle these calculations and distributions for you if we manage your assets. These payments are covered when we discuss tax planning and charitable giving. 

The amount of your required minimum distribution depends on your account balance and your marital status. (The numbers are different if you’re married and your spouse is more than 10 years younger than you, for example, versus if you’re married and your spouse is roughly the same age.)

One note: If you saved for retirement using a defined contribution plan (like a 401(k)), the rules are the same as for an IRA. However, in these cases, the plan sponsor (your employer/former employer) or the plan administrator (like Fidelity or TransAmerica) will calculate this number for you.

Planning for RMDs

If you don’t take an RMD in a given tax year, the IRS reserves the right to tax you 50 percent of the amount you didn’t take out. So if you were supposed to withdraw $10,000 and you only took out $2,000, the IRS could tax you $4,000 — half of the $8,000 you were required to withdraw but didn’t.

Our job is to make sure that doesn’t happen. But there are other considerations we can plan for. For instance, if you want to donate to charity, we can use your distribution for that. Doing so generally means the distribution won’t be taxed as income — so we can turn your RMD into both a tax planning and charitable giving strategy.

There is no penalty, on the other hand, for taking out more than the required minimum distribution.

Another way to avoid RMDs is to think about converting your retirement account to a Roth account. While you’d be required to pay income tax on the conversion, Roth accounts are generally exempt from RMDs while the owner is alive. We approach any Roth conversion strategically to make sure it fits in with your broader financial plan. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

RMDs and beneficiaries

If you inherit a retirement account, such as an IRA, it’s important to be aware of required minimum distributions. The rules require you to take RMDs and specify that all funds must be withdrawn from the account within 10 years for account inherited on or after January 1, 2020. 

If you’re inheriting an IRA from a spouse, there are more options in terms of how to handle the account. You could treat yourself as a beneficiary, name yourself as the account owner, or roll the funds into your own IRA. Which option is best for you will depend on your age, income, and other factors. It’s also possible to combine the different options. Planning for RMDs requires you to consider a number of different factors, but with annual tax planning meetings, we’ll make sure you understand how these distributions fit into your broader financial plan.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.