If you own a traditional Individual Retirement Account, there’s a moment in retirement that arrives with all the excitement of a jury duty notice: the year you must begin taking required minimum distributions or RMDs.
These withdrawals aren’t optional, and while the rules aren’t exactly thrilling, understanding them can help you avoid penalties and keep your financial plan running smoothly.
An RMD is the minimum amount you must withdraw from certain retirement accounts each year once you reach a specific age. For traditional IRA owners, that milestone is the year you turn 73. And unlike some employer plans, IRAs don’t give you any wiggle room. Even if you’re still working full-time, part-time or “I’ll-retire-when-I-feel-like-it” time, your IRA expects you to start taking money out at 73 — no exceptions.
Employer plans, however, play by slightly different rules. If you’re still working and don’t own more than 5% of the company, you can delay RMDs from your current employer’s 401(k). It’s one of the rare perks the IRS hands out without a stern look. But don’t forget: once you retire, that spigot must be turned on, too. The delay stops the moment your paychecks are done.
The first step in calculating an RMD is identifying your distribution year. This is the year for which the RMD applies — not necessarily the year you take the withdrawal. New RMD recipients get a one-time grace period: you can delay your very first RMD until April 1 of the year after you turn 73.
After that, the IRS expects each year’s RMD to be withdrawn by Dec. 31. Miss the deadline, and you may receive a penalty that can ruin even the best-planned holiday season.
Next, determine the account balance used in the calculation. Use the Dec. 31 value from the prior year and remember to add back any outstanding rollovers — money that left one account late in the year and landed in another after the new year. Forgetting those can throw off your calculation, and the IRS isn’t big on rounding errors.
Then determine your life expectancy factor. Most people will use the Uniform Lifetime Table, which assigns a factor based on age. But if your spouse is more than 10 years younger and is your sole beneficiary for the entire year, you get to use the Joint Life Expectancy Table instead. This often results in smaller RMDs — an unexpected bonus for age-gap couples everywhere.
Once you have your balance and life expectancy factor, the math is simple: divide the former by the latter. That number is your RMD. Straightforward? Yes. Forgiving if done incorrectly? Absolutely not. Any amount not withdrawn on time may trigger a penalty.
Finally, keep the aggregation rules in mind. RMDs from IRAs you own can be combined and taken from any one IRA. RMDs from 403(b)s can also be aggregated. But most other accounts — like 401(k)s and inherited IRAs — must each have their own RMD taken separately.
Understanding RMDs may not be glamorous, but it’s essential. With a little attention to detail, you can stay compliant, avoid penalties and keep your retirement income flowing exactly as planned.
Michelle Kuehner, a Chartered Financial Consultant and Master Certified Estate Planner, is the president of Personal Money Planning LLC, a Wichita Falls retirement planning and investment management firm.
This article originally appeared on Wichita Falls Times Record News: How to avoid IRA penalties and stay on track | Opinion
Reporting by Michelle Kuehner, Wichita Falls Times Record News / Wichita Falls Times Record News
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