Required Minimum Distributions (RMDs)
Unfortunately, the IRS does not allow you to keep funds in your retirement accounts indefinitely.
Traditonal Retirement Accounts (Pretax Contributions)
Generally, you must start taking withdrawals, commonly referred to as “Required Minimum Distributions” (RMDs), from your Traditional IRA account when you reach age 70½.
“One provision of the SECURE Act of 2019 increased the age at which RMDs would begin. If you were born after June 30, 1949, the beginning date for your first RMD must be no later than April 1st of the year following the calendar year in which you reach age 72.
Your Required Minimum Distribution (RMD) is the minimum amount that you must withdraw from your account each year. The RMD for any year is calculated by dividing the account balance as of the end of the immediately preceding calendar year by the distribution period from the IRS “Uniform Lifetime Table” that applies to you (there are three such Tables). A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.
These RMD rules apply to the following retirement accounts:
- Traditional IRAs
- SEP-IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit sharing plans
- Other defined contribution plans
All RMDs will be reported on a Form 1099-R and must be included in your taxable income in the year you received the RMDs. The taxable amount reported on Form 1099-R will be an aggregate of the contributions you had made, plus interest, dividends and capital gains realized in that account.
Beginning Date for First RMD
For IRAs, SEP-IRAs and SIMPLE IRAs, the beginning date for your first RMD is either:
- If you were born before July 1, 1949, April 1 of the year following the calendar year in which you reach age 70½
- If you were born after July 1, 1949, April 1 of the year following the calendar year in which you reach age 72
For 401(k), 403(b), profit sharing and other defined contribution plans, the beginning date for your first RMD is either:
- If you were born before July 1, 1949, April 1 of the year following the calendar year in which you reach age 70½
- If you were born after July 1, 1949, April 1 of the year following the calendar year in which you reach age 72, or
- When you retire (if your plan allows this option)
You may always withdraw more than the minimum amount required.
Tax Tip
If you don’t need the funds you receive from a Traditional retirement plan RMD to supplement your operating budget, consider a Roth Conversion. Yes, you will still have to pay the income tax liabilities incurred because you received the Traditional retirement plan RMD. However, now these funds can capitalize on The Power of Compounding and grow tax-free for the rest of your lifetime.
Roth Retirement Accounts (After Tax Contributions)
One significant advantage of Roth retirement plans is that they do not have Required Minimum Distribution (RMD) requirements for the original owner - unlike with Traditional retirement plans - which you must begin to tap at age 72. This means you are not forced take out a certain amount each year so these funds can remain in the Roth plan, compounding tax-free. If you don't need the money, you can let it continue to compound and grow in the Roth IRA tax shelter for the reminder of your life.
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