A common question we have received from our clients, pertains to “RMDs”. Well, what are “RMDs”? 

“RMD” stands for Required Minimum Distribution, which is an annual minimum amount that must be withdrawn from certain types of retirement accounts after you reach 72 years of age. Acknowledging that Americans are living and working longer, the SECURE Act has increased the previous RMD age from 70 ½ to 72, which applies to distributions made after Dec. 31, 2019 for individuals who reach 70 ½ from Jan. 1, 2020 forward. However, RMDs have been suspended by the CARES Act for the year 2020, allowing taxpayers to skip taking their 2020 RMDs from the qualifying account types described below. For more information about this please visit: Https://www.irs.gov/newsroom/irs-announces-rollover-relief-for-required-minimum-distributions-from-retirement-accounts-that-were-waived-under-the-cares-act 

This RMD acts as a safeguard against people who would use a retirement account to avoid paying taxes. The government has placed RMDs on individual retirement accounts to make sure they get their share-typical right?

 The IRS requires that you take these annual distributions from tax-deferred, defined-contribution retirement plans including: IRAs, 401(K)s, 403(b)s, and 457 plans etc. As far as a Roth IRA, you are not required to take an RMD if you own the account, but you would have to take an RMD each year if you inherit a Roth. These rules are also in place to ensure that investors do not build up a sizable tax-free retirement fund and then leave it as an inheritance to their children or other family members. Doing this would allow heirs to avoid paying the inheritance tax. At a certain point, retirees must take out a particular portion of their funds every single year. To which we say to the government, “clever girl”. 

The amount of your RMD is based on a formula which divides an account’s prior year-end value by the applicable distribution period or life expectancy of the account owner. The IRS has a worksheet to help taxpayers calculate the amount they must withdraw. 

The deadline for taking your first RMD is typically April 1 of the year after you turn 72, but for every RMD after, you must take your RMD by December 31st of each year to avoid the penalty. If you only take part of none of you RMD, the IRA rules require you to pay a 50 percent penalty on the amount of the RMD not taken. For example, if your calculated RMD is $5,000, you could potentially have to forfeit $2,500 to the IRS for not complying. That’s a lot of new shoes!

In closing, we hope you have learned a little more about RMDs today, and offer the following suggestions-

If you are like me, you may be forgetful, or you may be someone who tends to procrastinate (guilty)- so a helpful suggestion would be to apply an automatic RMD disbursement to your tax-deferred retirement accounts to avoid missing this deadline. We at Eagle Capital would be happy to give you that peace of mind. Set it and forget it! I like that. 

Also, another helpful tip, if you are planning on moving your retirement account from another firm to Raymond James, it may be beneficial to have your RMD disbursed to you before your transfer is initiated, as your current firm will have your prior year’s-end account value available which is necessary for calculating an accurate RMD amount, and accuracy is everything when it comes to money!

RMDs are generally subject to federal income tax and may be subject to state taxes. We encourage our clients who are approaching RMD age to consult with their tax advisors for more information & to assess how the RMD may affect income taxes.