R is for RMD – Required Minimum Distributions

R is for RMD – Required Minimum Distributions

Opening a retirement account isn’t exactly like a savings account where we can hold our money indefinitely. Instead, tax-advantaged retirement accounts allow us to save a part of our earnings tax-free for years. But Required Minimum Distributions or RMDs are how the government ensures we eventually pay our taxes.

Required Minimum Distributions are required for employer-based retirement accounts, traditional IRAs, SEP, or Simple IRAs. They are required by their owners and qualified retirement plan participants of retirement age. 

What exactly is an RMD?

Thanks to the SECURE Act of 2019, the age for RMDs changed from 70 ½ years to 72 years of age. Therefore, to avoid tax consequences, RMD or Required Minimum Distributions on retirement accounts require a withdrawal each year after you reach 72 years of age (or 70 1/2 before January 1, 2020) to avoid tax consequences. 

The exact amount of withdrawal needed varies each year. RMDs are calculated by dividing the account’s initial year-end fair market value by the applicable distribution period or end of life. Usually, resources from the IRS or your financial advisor can easily calculate this. 

(Roth IRAs do NOT require an RMD. This is because contributions were made with taxable income.) If you don’t take your RMDs by December 31 each year, you could be subject to a 50% penalty on the amount that wasn’t withdrawn.

While we must take the minimum amount every year, after 72, it is acceptable to take more. But this additional taxable income may both shock you and push you into a higher tax bracket. Still, more importantly, it may impact things like Social Security income and Medicare benefits.

Be sure to talk with a financial advisor about RMDs and the possibility of using a qualified charitable distribution (QCD). Since the IRA distribution is sent directly to the charity through your administrator, the QCD is not reported as taxable income. This is a win-win option for donors who want to support nonprofits in a tax-advantaged way!


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