7 Important Things To Know About Required Minimum Distributions, #79
If you’re approaching the age of 72 and you still have questions about Required Minimum Distributions (RMD), this episode is for you! We’ll take a deep dive into all things RMD so that you know what they are, how much you can expect to take out, and the best way to withdraw them. I’ll also give you helpful strategies to prevent RMDs from inflating your next tax bill. That way you can put more of your wealth to good use!
You will want to hear this episode if you are interested in...
What is a Required Minimum Distribution (RMD)? [1:30]
How much do you need to take out? [2:13]
RMD aggregation rules you need to know [4:17]
What can you do with the money from an RMD? [6:18]
Can you avoid an RMD? [7:04]
How is the money from RMDs taxed? [8:21]
How can I reduce my RMD tax bill? [9:35]
The basics of Required Minimum Distributions
Required Minimum Distributions may sound confusing, but they are rather straightforward. RMDs are an amount of money that the IRS requires you to withdraw from your retirement accounts at the age of 72. All IRAs are subject to these required distributions except for Roth accounts. Once taxes have been paid on the amount withdrawn, the money is yours to do with what you like. Reinvesting the money into a taxable investment account may be a wise choice, but using it to enjoy your retirement is a completely valid option as well. After all, you can’t take it with you!
One thing to be aware of with RMDs are the aggregation rules. You can combine your required contributions from regular IRAs and pay with one account, but you can’t lump that in with other workplace retirement accounts like a 401k or a 403b. This is where many retirees get into trouble and even advisors can get confused. My recommendation is to roll everything into an IRA with one advisor/custodian who can keep an eye on all of your accounts to make sure everything is done correctly. The last thing you want is to pay a 50% penalty to the IRS!
As the old saying goes…
Death and taxes may be unavoidable, but good wealth management strategies can at least lessen the blow of the latter. While continuing to work can delay Required Minimum Distributions past the age of 72, they won’t prevent them from kicking in the year after you retire. A better strategy to reduce the tax impact of RMDs is to begin taking money out as early as 65 or whenever you retire. You will likely have to pay more in taxes if you wait until you turn 72 versus paying fewer taxes over time if you start early.
Another fantastic RMD strategy for the charitably inclined is using a Qualified Charitable Contribution (QCD). QCDs allow you to donate your RMD to the 501c3(s) of your choice up to $100,000 per year, per person. That’s especially beneficial for those who can no longer itemize their taxes and are limited to writing off only $600 in charitable contributions per couple. Just make sure you donate the money through your financial institution by filling out their forms as you are unable to take receipt of the money and donate it yourself.