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How to Make the Most of Your Required Minimum Distributions

How to Make the Most of Your Required Minimum Distributions

February 28, 2019

Saving for your retirement can be tricky business and taking distributions from your retirement accounts can be even trickier. You must understand how required minimum distributions (RMDs) work so when you reach the age of 70 ½, you take these withdrawals as mandated. Withdrawing more or less than you should can cause unnecessary taxation or penalties—and we all want to avoid that.

It is important to take your required minimum distribution into account when you’re planning out your retirement. After all, most retirement accounts are called “tax-deferred” for a reason. Eventually, the government wants those taxes you deferred years ago so you could hopefully pay at a lower rate in retirement. When you understand RMDs and incorporate them into your retirement cost-of-living strategy, you can be set in your golden years. 

IRAs and qualified plans where RMDs come into play

  • Traditional and Roth IRA
  • Inherited IRA (traditional or Roth)
  • 403(b)
  • 401(k)
  • Roth 401(k), 457b, 403(b)

At age 70 ½, you’re required to withdraw the minimum amount for your traditional individual retirement accounts (IRAs). In the case of 401(k)s and 403(b)s, you don’t have to take RMDs until you actually retire. If you have other sources of income when you retire, the sensible plan is to only withdraw the required amount. Leave the rest of your savings to continue earning tax-deferred interest as long as you can!

It’s important to point out that of the above plans, the only one that does not require RMDs is your personal Roth IRA. But, if you inherit a Roth plan, you’re required to begin taking RMDs by December 31 of the year after the benefactor’s death. The distributions are recalculated using your life expectancy. However, if you are a spouse inheriting a deceased spouse’s plan, you can elect to treat that plan as your own. In that case, the RMDs are determined by your required beginning date for distributions.

Calculate your required minimum distribution 

The IRS Uniform Lifetime Table is a great resource. Find your age, then find the “life expectancy factor” that corresponds to your age. Divide your retirement account balance at the end of the previous year by your current life expectancy factor. Is your spouse 10 or more years younger than you? If so, and if they are the sole beneficiary to your account, use the IRS Joint Life and Last Survivor Expectancy Table instead. 

You do have the option of waiting until April 1 of the following year after you turn 70 ½ to take your first RMD. However, you must take a second distribution by December 31 of the same year to stay on track. After that, all distributions are required to be taken by December 31 every year. 

For those who have multiple IRAs

If you have multiple IRAS, consider consolidating them. With more than one traditional IRA, you have to have to calculate distribution factors for each one. By moving funds into fewer accounts, you’re less likely to make a costly mistake by not taking out the minimum withdrawal for an account. The penalty for not taking an RMD on an account is 50 percent of the amount that should have been taken out. Consolidating your IRAs can simplify asset allocation and rebalancing, tax reporting, beneficiary management, and reduce fees. If you decide to keep your IRAs separate, you can total the minimum amount to be taken and take the total amount from one or more IRAs. 

Multiple plans with multiple employers

While you have the option of consolidating multiple IRAs, you are unable to combine your 401(k) or 403(b) plans from multiple employers. But, if you have multiple 403(b)s from the same employer, you can combine those. Otherwise, you must calculate and take the distributions separately. These accounts can also be taken at age 70 ½ or the year of retirement if later. You don’t have to take distribution from your current employer until you retire, as long as you don’t own 5 percent or more of the company.

As we said, planning for retirement can be tricky. But, retirement shouldn’t have to be! Make sure you stay informed of the stipulations regarding each account you have. Always consult with a trusted financial or tax advisor who can help you calculate your RMDs within the guidelines.