Retiring is an exciting time. You finally have the freedom to do whatever you want, whenever you want. All those years of saving and investing your money wisely are finally paying off! But, as you probably already know from doing your research, before you decided which retirement savings plan was best for you, there can be a lot of “fine print” things to consider. One such element is RMDs.
Luckily, these required payments were put on a hold, of sorts, during the initial Covid-19 setbacks in 2020. Now that things are getting somewhat back to normal, the exemptions of last year no longer apply.
Newly retired and not familiar with the ins and outs of RMDs? While there are rules that apply to them, they are not as confusing as they first appear. Today, we'll cover what an RMD is, what types of retirement plans have them, how Roth IRAs differ, and how you can calculate your own RMD.
What is an RMD
So, what is an RMD? As you've gathered from the title, RMD stands for Required Minimum Distribution. Put simply, it's the amount of money you have to withdraw from certain retirement accounts each year to avoid tax penalties. This applies only to accounts after you reach a certain age. As of 2020, this age was changed from 70 ½ to 72. After turning 72, you must withdraw a certain amount by April 1st of the next year. You must do this annually, on time, every year after this.
It's also worth noting that you can take out more than the minimum amount if you desire. Also, if you have more than one savings account, you will likely need to calculate a separate RMD for each subsequent one.
You might be wondering what exactly is the purpose of RMDs. Basically, they are to prevent people from avoiding paying taxes. It's very important to withdraw RMDs on time. If you miss your annual date, you can receive a 50% tax penalty on all money not withdrawn from an account.
Types of Retirement Plans that have RMDs
Most employer-sponsored retirement plans are subject to RMDs. They include:
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Traditional IRAs
- SEP IRAs
- Simple IRAs
- Thrift Savings Plans
Roth IRAs are also subject to RMD rules, but come under different circumstances.
All of these plans require you to start withdrawing RMDs at the same age (72). In some cases, there may be special exceptions according to the rules of your plan. For instance, you may not have to worry about RMDs until after 72 if you have not retired by then.
So long as it hasn't already been taxed, withdrawals from your retirement accounts will count as taxable income.
Roth IRAs and RMDs
As mentioned above, Roth IRAs operate a little differently than other types of retirement plans. While they do still have RMDs, they are not paid during the original IRA holder's lifetime. The main reason for this is because taxes are taken out of contributions to Roth IRAs before retirement. Whether you decide to take any funds from this account before your death or not, you will not be required to take an RMD.
That said, your beneficiary may have to after your passing to avoid penalties. Needless to say, it's important to talk about this stipulation with your beneficiary if you are thinking about using a Roth IRA.
There are some ways that may ease what could be a financial burden for your loved ones. Look into Inherited IRAs or lump-sum distributions from the Roth IRA.
Calculate Your RMD
Now that you have more background information on RMDs, you may be wondering how to calculate one so that you don't receive any penalties. Fortunately, there are plenty of resources to help you calculate these.
First of all, your RMD takes into account your retirement plan's balance at the end of the previous year and your life expectancy. There are several RMD tables that can be referenced, depending on your marital status and your beneficiary's relationship to you. These RMD worksheets from the IRS are also very helpful. Plus, it's important to use these every year so you have the latest information so no miscalculations are made.
Contact Benefit & Financial of Flagstaff, AZ
Required Minimum Distributions can seem like a hassle, but so long as you keep a record of your account balances, set a reminder for the RMD date, and use the appropriate RMD calculator from the IRS, you won't have to face the worry of tax penalties on your hard-earned money.
If you're still feeling overwhelmed, Benefit and Financial is happy to help. We have been working with the residents of Flagstaff, AZ and beyond for all of their personal and business financial needs for over 30 years. From retirement planning to group benefits for employees, our professionals are eager to help you achieve your financial goals. Give us a call or send an email today with any questions you may have or to schedule an appointment.