RMDs, or minimum required distributions, exist so the government can receive tax revenue from citizens. Otherwise, many taxpayers could accumulate tax-free wealth for the foreseeable future. Some retirement savings accounts will let you accumulate tax-free savings for many years, once a taxpayer turns 73 years old, they must begin withdrawing from essentially any tax-advantaged retirement accounts. The deadline to take out your RMD typically falls on December 31 every year. In Orlando, a financial advisor can help you calculate your minimum required distribution and when to take out an RMD.
Here are the RMD essentials to understand before withdrawing.
How Do RMDs Get Taxed?
When we get into a higher tax bracket, Social Security or Medicare may be affected by a higher income. Unless your contributions are made on a Roth account, for instance, withdrawals from an RMD account are typically a part of your taxable income bucket. Income tax must be paid on RMDs. The only exception would be RMDs taken from a Roth 401(k) since those are exempt from taxes.
When Should RMDs Be Taken Out?
Until recently, RMDs had to be taken out starting at the age of 72. The age has been increased to 73 for starting to take out the distribution minimum. The timing can vary for RMDs. Whether you take out staggered amounts or one large withdrawal, the same amount of taxes will be paid eventually. However, taking out money earlier rather than later could cost you as there is not enough time for your money to grow in your account. By waiting until later in the year to withdraw, there is potential for market gains. With the reward for waiting, however, there is also a risk of market losses to minimize the amount you may withdraw for yourself. Talking with a financial advisor in Orlando can help you decide which strategy works best for your individual needs.
RMDs vs. Inherited IRAs
If you are the beneficiary of a recently deceased person’s retirement plan, you may be eligible for an inherited investment retirement account (IRA). Those who have an inherited IRA may be subject to RMD withdrawals. The same RMD account must be used for those withdrawals. However, depending on what kind of designated beneficiary you are (spouse, disabled, child) the RMD account rules can vary. If the deceased didn’t withdraw from their RMD before they died, the beneficiary takes on ownership of that account.
What Happens If An RMD Is Not Taken Out?
The deadlines for RMDs are extremely important. If they are not met, 50% of the taxes that weren’t met must be paid. If you notify the IRS quickly of any missed deadlines they may be able to help you waive the fees, but otherwise, the steep fees must be paid. If you don’t need to take out an RMD, the IRS ultimately suggests that you donate any extra money to charity.
How To Calculate An RMD
To calculate an RMD, you have to divide your balance number by the factor number. To do this you must understand your account balance total as of December 31 in the previous year, then calculate the distribution factor based on the RMD chart as it correlates with your birthday. If you need assistance calculating your RMD, you can always contact a financial advisor in Orlando to help walk you through the steps.