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. Plus, beginning January 1, 2020, the rules concerning RMDs were updated.
Like many investors, you're likely aiming to build a comfortable nest egg to ensure a comfortable retirement. Among retirement financial planners, this is called the "accumulation phase." In this phase, your goal is to invest wisely by choosing stocks with long-term potential for your retirement portfolio, such as
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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.
Making plans for the distribution stage involves deciding where you'll live in retirement, whether you'll travel, your proposed leisure activities, and more decisions that will affect your spending during your golden years.
Along with these aspects, it is important to consider the RMD that applies to most retirement accounts. Essentially, the IRS requires you to withdraw a specific sum from your qualified retirement accounts once you attain a certain age. That age used to be 70 1/2 but it is now 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.
The Most Important Things to Know About RMDs Which types of accounts have RMDs? Qualified retirement accounts such as IRAs, 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 does it become necessary to begin taking distributions? Your first distribution must be taken by April 1 of the year following the calendar year that you turn 72 (for most accounts). Also, if you retire after that age, you must take your first RMD from your 401(k), profit-sharing, 403(b), or other defined contribution plan by April 1 of the year after the calendar year in which you retire.
For each year after your required starting date, you must take your RMD by December 31. Note that you don't need to take an RMD on a Roth IRA since you covered taxes before contributing. Other varieties of Roth accounts require RMDs. But, there are approaches to avoid them - for instance, you can roll your Roth 401(k) into your Roth IRA.
What happens if I don't take my RMD? The penalty for not taking a required minimum distribution, or not taking a large enough distribution, is a 50% tax on the amount not withdrawn in time. How much cash do I need to withdraw? The RMD you are required to take is calculated by dividing your previous year's December 31st retirement account balance by a "distribution period" factor dependent on your age.
Here's an example to give you an idea of the amount: Ann is 71 and will take her first RMD in the year following the year she turns 72. Her IRA balance at the end of the prior year was $100,000. Her "distribution period" factor is 27.4. Dividing $100,000 by 27.4 equals $3,649.63. This is how much Ann is required to withdraw for her first RMD.
Learning about the "distribution phase" is just one aspect of preparing for your nest egg years.
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