Year after year of hard work is always rewarded in retirement. Saving during this golden age is now practically a priority in the lives of our retirees (and workers).
It is clear that we all dream of a future in which we can enjoy what we have worked for, but when that time comes, there are rules that we may not have anticipated or were not fully aware of. One of these rules is called Required Minimum Distributions (RMD).
Rules like this one may appear to be obstacles, but they are there to protect your savings! If you are about to retire or are already enjoying it, this article will explain how to understand RMDs and how to manage them so that you get the most out of them!
What are Required Minimum Distributions (RMD)?
Imagine you have a jar full of candy that you’ve been saving for years, but someone tells you that you should empty it every now and then.
RMDs are the minimum amounts you must withdraw from your retirement accounts each year once you reach the age of 73. For example, if you were born in 1951, the deadline to make your first withdrawal is April 1, 2025.
Even if you don’t need the money, you are required by law to make these withdrawals; it is preferable to withdraw the money rather than be fined!
How do I know how much to withdraw?
The IRS employs a formula based on two factors: your total account balance at the end of the previous year and your life expectancy, as determined by IRS tables. Thus, the younger you are when calculating the RMD, the lower the percentage you must withdraw.
Assume you have an IRA account with a balance of $500,000 at the end of the previous year. According to IRS life expectancy tables, if you are 73 years old, you have an estimated life expectancy of 26.5 years.
Divide your account balance by your life expectancy to determine how much you should withdraw.
- Formula: RMD = Total account balance ÷ Life expectancy
- Applying the data:
- RMD = $500,000 ÷ 26.5
- RMD = $18,867.92
In this case, you would need to withdraw at least $18,867.92 from your account during the year to comply with IRS rules, easy, right?
Who does this rule affect?
RMDs apply to most retirement accounts, such as:
- Traditional IRAs.
- SEP IRAs or SIMPLE IRAs.
- Employer-sponsored retirement plans such as a 401(k), Roth 401(k), 403(b) or 457(b).
There are important exceptions, though:
- If you’re still working and have an employer-sponsored retirement plan, you can postpone RMDs until you retire unless you own more than 5% of the company.
- Beginning in 2024, Roth accounts within a 401(k) or 403(b) will be exempt from RMDs while the owner is alive.
Are there any consequences if I don’t do it?
Keep in mind that the RMD amount will have a direct impact on your tax return because it is taxable income. So, keep in mind that you must do the math every year because your balance will change as much as your life expectancy.
If you do not withdraw the money, the IRS may fine you up to 50% of the amount not withdrawn, so since we do not want anything else to affect our retirement plans, we recommend that you consult with an advisor or visit the IRS official website for more information.
Remember that the goal of this measure is to protect your retirement funds, so start heading to the ATM now to avoid missing the deadline!
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