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Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS - February 20, 2020
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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 Boston Properties (BXP - Free Report) , a current top ranked dividend stock.
But there is a second phase of retirement planning that gets less attention, even though it's the more enjoyable part. It's the "distribution phase," which simply means spending the assets you've worked so hard to accumulate.
Planning for the distribution phase is the time where you may make decisions about where you'll want to live in retirement, whether you'll want to travel, hobbies you may pursue, and other decisions that will affect 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.
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 subsequent year after your required beginning date, you must take your RMD by December 31. Note that you do not have to take an RMD on a Roth IRA since you paid taxes prior to contributing. Other types of Roth accounts require RMDs. However, there are ways to avoid them. For example, you can roll your Roth 401(k) into your Roth IRA.
What happens if don't take my RMD? The penalty for not taking a required minimum distribution, or if the distribution is not large enough, is a 50% tax on the amount not withdrawn in time.
How much money do I have to withdraw? To calculate a specific RMD, you must divide your prior year's December 31st retirement account balance by a "distribution period" factor based 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.
To learn more about the tax implications of retirement spending - and much more about retirement planning - download our free guide: Retirement Made Easy.
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Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS - February 20, 2020
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 Boston Properties (BXP - Free Report) , a current top ranked dividend stock.
But there is a second phase of retirement planning that gets less attention, even though it's the more enjoyable part. It's the "distribution phase," which simply means spending the assets you've worked so hard to accumulate.
Planning for the distribution phase is the time where you may make decisions about where you'll want to live in retirement, whether you'll want to travel, hobbies you may pursue, and other decisions that will affect 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.
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 subsequent year after your required beginning date, you must take your RMD by December 31. Note that you do not have to take an RMD on a Roth IRA since you paid taxes prior to contributing. Other types of Roth accounts require RMDs. However, there are ways to avoid them. For example, you can roll your Roth 401(k) into your Roth IRA.
What happens if don't take my RMD? The penalty for not taking a required minimum distribution, or if the distribution is not large enough, is a 50% tax on the amount not withdrawn in time.
How much money do I have to withdraw? To calculate a specific RMD, you must divide your prior year's December 31st retirement account balance by a "distribution period" factor based 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.
To learn more about the tax implications of retirement spending - and much more about retirement planning - download our free guide: Retirement Made Easy.