All You Need to Know About RMDs
In this article, you will learn everything you need to know about RMDs. They can be confusing, but Tranel Financial Group is here to help you navigate this important step in your financial planning for your future. From what RMDs are, to how to calculate them, we will guide you through the ins-and-outs of the process.
RMDs THE BASICS
What are RMDs?
You might have already heard the term RMD if you’re getting close to the age 70. RMDs -- or Required Minimum Distributions -- are a small amount of money you must withdraw from your IRA assets every year after you reach the age of 70½.
When do You Withdraw Your RMDs
In the year in which you turn 70½, you will have until April 1st of the following year to take your initial RMD. For example, if you turn 70½ in 2020, you would have until April 1st, 2021 to take your initial RMD. Every subsequent year, you will have to take your RMD by December 31st of each year.
- 1st Year - Withdraw RMD by April 1st of the following year
- 2nd Year and So On - Withdraw RMD by December 31st
What if I Forget to Withdraw?
Penalty for not taking this withdraw is 50% of your RMD amount.
Subsequently, after you pay the 50% you will still have to withdraw your RMD and pay taxes on that amount. Make sure you mark your calendar, so you do not get charged the penalty.
If you do get charged the penalty for your first RMD withdraw, fear not, there’s still hope! First, get the RMD amount to the IRS as soon as possible. Next, calculate the penalty on Form 5329, but do not send a check to the IRS. Instead, write a letter to the IRS as to why you were unable to meet the deadline. In most cases, the IRS will waive your fee for the first missed RMD withdraw.
How to Calculate RMD Amount
In order to calculate your RMD amount, you will need 2 numbers:
- Your total IRA asset amount as of December 31st of the prior year, including your 401K (assuming you are retired)
- Your Life Expectancy Factor -- see the IRS Uniform Lifetime Table to find your corresponding Life Expectancy Factor number*
Now you will divide your Total Assets, by your Life Expectancy Factor.
Example: $250,000 (Total Assets) / 26.5 (Life Expectancy Factor) = $9433.96 RMD
* Important: In the case that your spouse is 10+ years younger than you and is your sole primary beneficiary you must use the Joint Life and Last Survivor Expectancy Table (instead of the Uniform Lifetime Table). This table is available on the IRS website under IRS Publication 590.
What Portion of my RMD is Taxable?
You are required to pay income tax on your RMD withdrawal amount. In order to calculate the taxable portion of your RMD, you must fill out Form 8606 on the IRS website.
What do I do with my RMD?
It is important that you do not put your RMD back into an IRA account. Doing so would cause you to be taxed twice on that amount. The IRS is not concerned with what you do with your RMDs, as long as you pay the appropriate tax.
Talk to a representative at The Tranel Financial Group, and let us help you determine the best investment to allocate your RMDs and allow your money to continue growing!
RMDs IN DEPTH
From Which IRA Accounts Do I Withdraw RMDs?
You already know that you must withdraw RMDs from your IRA Asset accounts, but what types of IRA Accounts do these rules apply to? You must withdraw RMD from the following retirement accounts:
- Traditional IRAs
- Rollover IRAs
- SIMPLE IRAs
- SEP IRAs
- Most Small-Business Accounts (Including Keoghs)
- Most 401k and 403b Plans
Which IRA Accounts Are Exempt from RMDs?
Roth IRAs are excluded from RMD withdrawals.
What If I am Still Employed?
If you are still employed (aka not retired) after the age of 70½, and you have money in a 401k account, you do not have to take an RMD from that account. However, you are still subject to withdraw RMD from all other IRA assets or old 401Ks.
For example, if you have a 401k account from your previous job, you must withdraw RMDs from that account. However, you do not need to withdraw RMDs for your current job.
Upon retirement from your current position, you will have to begin taking RMDs from that 401Ks as well.
How to Calculate RMDs for More Than 1 Retirement Plan
You’ve already learned how to calculate the RMD for one account. Recall the formula:
Total Assets/Life Expectancy Factor = RMD
Using this formula, you are ready to calculate your RMD for multiple accounts. First, simply calculate the RMD for each account separately.
- Account A $250,000/22 = $11,363.63
- Account B $100,000/22 = $4545.45
- Account C $50,000/22 = $2272.72
As you can see above, we have calculated the RMD for Accounts A, B, and C. Using our example, we have 2 options:
- OPTION 1: You can withdraw the calculated amount from each account. For example, withdraw $11,363.63 from Account A, withdraw $4545.45 from Account B, and withdraw $2272.72 from Account C.
- OPTION 2: Instead of withdrawing the amounts from each account individually, you may withdraw the sum of all RMDs from any of your three accounts. For example: $11,363.63 + $4545.45 + $2272.72 = $18,181.80 Total RMD. You could withdraw the total of $18,181.80 from either Accounts A, B, or C.
What if the Account Owner Passes Away Before the Age of 70 ½?
There are several different possibilities depending on who your beneficiary/beneficiaries are:
If your sole beneficiary is an entity beneficiary, like a charity, the remainder of the IRA account must be withdrawn and distributed after 5 years. More specifically, it must be distributed by December 31st of the 5th year after the year of death.
If the sole beneficiary is an individual, they may do the same as an entity beneficiary and withdraw the total amount after 5 years, OR they may choose to begin RMDs in the year following death. This calculation will be based on the life expectancy of that beneficiary. This number can be found on IRS Table, Appendix B, Table 1.
If there are multiple beneficiaries, the Life Expectancy of the oldest beneficiary is used to calculate the RMD amount. However, in the case that each beneficiary has been given separate accounts, each beneficiary will use their own Life Expectancy to calculate the RMD.
If your beneficiary is a spouse, they may follow any of the previous methods. On top of that, they may wait until the year that the deceased account owner would have turned 70½ and then begin taking the RMD based on the surviving spouse’s Life Expectancy. Additionally, a spouse may choose to roll over the IRA Account to their own IRA account. Many spouses choose this option.
Do I Have to Withdraw my RMDs as Cash?
Most RMDs are withdrawn as cash, but they don’t have to be! You have other options for withdrawing your RMDS. You may withdraw RMDs as stocks, real estate, mutual fund shares, or any other investment. When you withdraw an RMD as an investment, this is referred to as “in-kind”.
It is important to know about “in-kind” withdraws, in case you do not want to spend your retirement money.
Can I Withdraw More Than my RMD Amount?
Of course! RMDs are a minimum requirement for your yearly withdraw, but you can always take out more. If you plan on using the money, it’s okay to withdraw. However, if you do not plan on using it, it’s suggested you leave it in your IRA Account so that your funds are not taxed.
RMDs can be a complicated subject to learn about, but it’s important to understand the different ways you can withdraw your RMD, the dates that you must note, and how to calculate your RMD amount. We have covered the basics of RMDs and gone a little bit more in depths into specific problems or questions you may encounter as you navigate the challenges of retirement.
We hope to have made your retirement planning less complicated and easier to understand. We know that you may still have some questions regarding RMDs. We are here to help. Reach out to us at Tranel Financial Group, to learn how we can help you plan for the future.