For many retirees, Required Minimum Distributions can feel frustrating and confusing. While some individuals rely on their RMDs for living expenses, for others RMDs represent additional taxable income that can push them into higher tax brackets or trigger Medicare IRMAA surcharges. What are the key things to know about RMDs?
Who? Individuals over the age of 73 or those who inherited a retirement account from someone who was required to take RMDs. There are some exceptions, most commonly people who are over 73 and still working. Individuals who are still working are not required to take RMDs from an employer’s retirement plan if actively participating in the plan. However, people over 73 who are working still need to take RMDs from other retirement accounts if they have them (IRAs, former employer 401(k), etc.)
What? A minimum withdrawal from your retirement account based on your age, your account balance at the end of the previous year, and the appropriate mortality table (generally the Uniform Lifetime Table). Roth accounts are not included in the calculation of RMDs.
When? You must take your RMD by December 31st and there is a penalty for failing to take the full distribution.
The timing of the first two RMD payments can be a little confusing. Your first RMD must be taken no later than April 1st of the year following the year you turn 73. Your second RMD is due in December of the year after you turn 73.
For example, if you turn 73 in 2025 your first RMD would be based on your December 2024 balance and due no later than April 2026. Your next RMD based on your December 2025 balance would be due in December of 2026 and then you would have an RMD due every December after that.
Where? The most common places to get guidance on RMDs are your financial advisor who helps you with your retirement account and your accountant. The IRS website (www.irs.gov) also contains information regarding RMDs including a worksheet to calculate your RMD.
Why? Contributions to traditional retirement accounts go in pre-tax and reduce your tax burden in the year you make the contribution. Contributions then grow on a tax deferred basis. The government wants to eventually receive tax revenue from these assets, and the RMD obligation is a way to accomplish that. RMDs prevent people from avoiding taxation by holding retirement assets in perpetuity.
Questions or need help with RMDs? Reach out to us at Berkeley Capital Management or your tax professional today. Every December there is a year-end rush to tackle RMDs. We help our clients plan for and distribute their RMDs in an intentional way to reduce year end stress. contact us here.