Required minimum distributions (RMDs) are government forced withdrawals from your IRAs, 401(k)s, 403(b)s, or any qualified plan. They are based on your account balance and life expectancy. If you are not familiar with RMDs, here are a few important things you should know:
1. Taxes will need to be paid on your RMDs
Anytime you withdrawal money from your IRAs, 401(k)s, 403(b)s, or any qualified plan you will have to pay taxes. Money is taxed at ordinary income, the highest possible rate. Make sure you and your adviser are prepared in order to avoid sticker shock.
2. They begin when you turn 70 1/2
RMDs kick in the year you turn 70 1/2. They can be taken at any time during that calendar year. You also have until April 1st of the following year to take the distribution. It is important to discuss with your financial adviser and tax adviser as to when you should take them.
3. No RMDs on 401(k)s if you are still working
If you have retirement savings in traditional IRAs, you will be subject to RMDs regardless of employment status. However if you reach 70 1/2 and you are still working and have savings in your 401(k), you can delay RMDs for as long as you are employed. Remember you must be employed by the company sponsoring the plan and you cannot own more than 5% of that company. Once you leave the company RMDs will begin on that 401(k).
4. Ouch! It will cost you more if you fail to take distributions
The IRS assesses a whopping 50% penalty on undistributed assets. That means if you were supposed to take an RMD of $10,000 and you failed to take it, you will donate $5,000 to the IRS for failing to do so. Remember after 70 1/2 all distributions must be taken by December 31st. It’s very important you and your adviser pay close attention to RMD deadlines.
5. Roth IRAs do not have any RMD requirement
One major benefit aside from tax- free withdrawals in retirement is there is no RMD requirement for Roth IRAs. You can let your Roth IRA sit for as long as you want.
Required minimum distributions can really trip you up if you are not careful. If you are approaching 70 1/2 it is important you receive guidance from your financial adviser and tax adviser. Proper planning will help you navigate through the complexities of RMDs and will keep you out of precarious financial situations in the future.
Schedule your Strategy Session with CKS Summit Group
If you are interested in learning how to better organize your own retirement finances, please contact one of the experts at CKS Summit Group. We are always available to assist you in making smart retirement income planning decisions to suit your individual needs.
To contact a member of the CKS team, visit our Contact Page or give us a call at (586) 286-5820. We look forward to working with you soon!