3 Investing Facts About Required Minimum Distributions You Need to Know - January 17, 2020

Zacks Equity Research

Failing to withdraw a required minimum distribution (RMD) from your own or an inherited IRA by the deadline results in a big tax code penalty: 50%. That's right. If you were supposed to take out a minimum of $4,000 and (oops!) did not do so, you have the privilege of writing the IRS a check for $2,000. It's important to remember that the rules related to RMDs changed on January 1, 2020

Like the majority of investors, you're most likely working on a retirement portfolio that will provide a large enough nest egg to give you a comfortable retirement. Retirement financial planners refer to this as the "accumulation phase." Your goal in this phase is to choose investments with long-term growth potential - for example, a current top ranked dividend stock like Atmos Energy (ATO).

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.

Preparing for the distribution stage is where you may settle on choices about where you'll live in retirement, whether you'll wish to travel, interests you may seek after, and different choices that will influence your retirement spending.

Along with those choices, you need to be mindful of the RMD, because it applies to the majority of retirement accounts. This IRS rule requires you to withdraw a specific minimum amount from any qualified accounts you have when you reach a certain age--previously it was 70 1/2, but beginning in 2020, it is 72.

Why does the IRS require these distributions? It's straightforward - they need to ensure they get their tax. In the event that this standard didn't exist, individuals could live off other pay and never pay tax on their retirement investment returns. So, that cash could be left to family or companions as an inheritance without the IRS getting any taxes from you.

What You Need 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 turn 72. If you retire after 72, you must withdraw your first RMD from your 401(k), profit-sharing, 403(b), or other defined contribution plan by April 1 of the year following the calendar year that you retire.

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 71 and must take her first RMD in the year following the year she reaches age 72. 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 that Ann must withdraw for her first RMD.

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.


You'll find useful, detailed steps to help you navigate both the accumulation and distribution phases of retirement planning. Get Your FREE Guide Now
 
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