Time waits for no one. More of the Baby Boomers (those born between 1946 and 1964) are either approaching or hitting that 73-year-old financial milestone.
Why is 73 a significant financial milestone? Because that is the age when you are required to begin taking your required minimum distribution, or RMD, from your retirement plan. This RMD rule is in place to prevent individuals from avoiding the deferred tax liability owed on their retirement contributions.
An RMD is the minimum amount that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 73 (so, those born in 1952 are on the clock, with 1953 babies up next up). Owners of traditional IRAs must begin taking RMDs once the account holder is age 73, even if they’re retired. Account owners in a workplace retirement plan (for example, a 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they’re a 5% owner of the business sponsoring the plan.
Which retirement accounts?
The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. The total amount of your RMD is taxed as ordinary income at your personal federal income tax rate. State taxes may also apply.
One way around paying taxes on an RMD is to make a Qualified Charitable Distribution (QCD) QCD’s allow individuals age 70 and older to make tax-free donations directly from an IRA directly to a qualified charity, potentially satisfying all or part of their annual RMDs from their IRA accounts Generally, you can make a QCD from any tax-deferred IRA account, such as a traditional IRA, inherited IRA, SIMPLE IRA, and SEP IRA. However, a direct transfer of a QCD from a SIMPLE or SEP IRA can only be done if the account is inactive—meaning you’re no longer contributing to it. That said, the IRS does not allow you to make a charitable contribution from a workplace retirement plan, like a 401(k).
An IRA owner must calculate the RMD separately for each IRA they own but can withdraw the total amount from one or more of the IRAs. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.
Retirement plan participants and IRA owners, including owners of SEP IRAs and SIMPLE IRAs, are responsible for taking the correct amount of RMDs on time, every year from their accounts, and they may face stiff penalties for failure to take RMDs.
Roth IRAs do not require withdrawals until after the death of the owner.
An IRA owner must calculate the RMD separately for each IRA they own but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b)-contract owner must calculate the RMD separately for each 403(b) contract they own but can take the total amount from one or more of the 403(b) contracts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.
According to the IRS, your first RMD can be delayed until April 1 of the year following the calendar year in which you reach age. Subsequent RMDs generally have to be made by December 31.
How are RMDs calculated?
Generally, an RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in “Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).” Make sure that you’re using the latest worksheets because the tables are updated to reflect life expectancy changes.
Different situations call for different tables. For example, if you have a non-Roth IRA and the account’s sole beneficiary is your spouse, and your spouse is more than 10 years younger than you, you will need to use a different table than other account holders. Choose the life expectancy table to use based on your situation.
Any withdrawal paid to you in the year you are required to take an RMD will count toward the RMD for the tax-deferred retirement account.
Inherited IRA RMDs
Different rules apply to inherited IRAs. An Inherited IRA, or a Beneficiary IRA, is an account that is opened when someone inherits an IRA or employer-sponsored retirement account after the original owner’s death.
For defined contribution plan participants, or IRA owners who die, the SECURE Act requires the entire balance of the participant’s account to be distributed within 10 years. This 10-year rule has an exception for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person or a person not more than ten years younger than the employee or IRA account owner. The 10-year rule applies regardless of whether the participant dies before, on, or after, the required beginning date. The required beginning date is the date an account owner must take their first RMD.
Deadlines and penalties
You do not want to miss an RMD deadline. If an account owner fails to withdraw the full amount of the RMD by the due date, the amount not withdrawn is subject to a 50% excise tax. However, as of the passage of the Secure Act 2.0, the excise tax rate is reduced to 25% or possibly 10% if the RMD is corrected within two years. Regardless, it is important to plan ahead and make sure you meet the deadlines.
The IRS publishes a worksheet that makes it very easy to calculate how much you must take out each year. Most people satisfy their RMDs and then some within a given year. But remember, you have the whole year to meet your RMD.
When taking RMD’s or even tapping traditional IRA’s, one should be aware of Medicare income-based surcharges. Taxpayers become subject to the income-related monthly adjustment amount when their income exceeds certain thresholds. To see more, Check
https://www.ssa.gov/benefits/medicare/medicare-premiums.html
Another thing to be aware of is that RMD’s are not necessarily made by the custodian. Usually this is something the account owner physically has to do. Thus, making sure you know where your accounts are and which are retirement accounts is very important.
RMDs can become complicated. As always, seek help from a financial adviser and/or a tax accountant.
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
As always, if you have any questions about this report or any other questions, please reach out to Bowen Asset at info@bowenasset.com or (610) 793-1001.
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