It’s time to start thinking about RMDs – those Required Minimum Distributions that you must take from your retirement plans every year, once you reach age 72. Of course, those withdrawals can be made at any time of the year – but many people leave it to the last minute, which could be an expensive mistake.
What IS an RMD?
Over your working years, you made tax-deductible contributions to your retirement plan – either a 40l(k) or403(b) at work, or perhaps an Individual Retirement Account. And the money in those accounts has been growing tax-deferred over the years.
Now the government wants its share of that retirement windfall! You might not want to take any withdrawals, especially if you have other savings to live on. But the rules say that starting at age 72, you <
(Technically, the rule states that you must make your first withdrawal by April 1 of the year following the year you reach age 72, but that would generate two RMDs in one year!)
How To Calculate Your RMD
The amount of your RMD is based on a formula that is designed to nearly draw down your account over your projected actuarial lifetime – based on the government’s Uniform Lifetime Table.
To find the amount of your RMD, just do a Google search for “RMD Calculator”. Many financial firms have online tools that allow you to input your age and the total balance in all of your retirement accounts AT THE END OF LAST DECEMBER!
That may be especially painful this year, since most retirement accounts have followed the overall stock and bond markets to significant losses. Yet, your 2022 RMD will be calculated on the value at year-end, December 2021. Thus, the percentage that must be withdrawn at your specific age might take a bigger chunk out of your now-smaller portfolio!
You don’t have to do the RMD calculation yourself. Just ask any of your retirement plan custodians to do the work for you. However, you must give them the total value of ALL your retirement accounts at the past year-end to make the correct calculation.
Where and When to Withdraw
You can take your RMD from any one of your retirement accounts, or a bit from each one of them. As long as the total amount withdrawn adds up to the prescribed RMD, you’ll be fine. There’s a 50% tax penalty of the amount you should have withdrawn if you fail to take your full RMD.
You can take your RMD monthly or at any time during the year. Or you can wait until the end of the year to make your withdrawal. But don’t wait too long, as the IRA custodians get very busy with procrastinators at year-end.
Eventually you might decide to consolidate your retirement accounts with one custodian. Be warned that once you’re over age 72 the custodian will require you to take an RMD first, before doing a rollover.
Remember, this withdrawal is taxable as ordinary income. So be sure to instruct your custodian to withhold at least 20% for taxes — or more, if you’re in a higher tax bracket. Your alternative is to file a quarterly estimated tax return to cover these withdrawals.
One Exception to Taxes on RMDs
Amounts distributed directly to a charity (Qualified Charitable Distributions — QCD) can be counted toward satisfying your RMD for the year, up to $100,000. The QCD is excluded from your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later on.
Once withdrawn, the money is yours to save or spend. But you must pay the taxes (unless you donate part of your RMD directly to a charity). Taxes are the price you pay for your diligent savings and investment success!
Why think about RMDs now? If the market sells off at year-end – and that’s a 50/50 proposition – you will have to sell more fund shares to fund your RMD. You could sell some stocks or funds now, and leave the money in a money market fund until December – easy to access for your RMD, and potentially less painful!
One more reminder: This year, keep your December retirement account statements and do the RMD calculation in January. The number won’t change, except that you’ll be a year older in the online calculator. That way, you can be prepared for the withdrawal that must come in 2023.
And that’s the Savage Truth.