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Disclosures:
Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice, nor is it intended to supplement professional individualized advice. Please consult a professional applying any of the approaches or strategies made referenced directly or indirectly in this report.
Required Minimum Distributions (RMDs) are the minimum amounts that retirement plan owners must take out from their accounts annually. Your RMD withdrawals are taxed as ordinary income.
Failure to take RMDs can result in significant penalties as the IRS wants to ensure retirees pay their taxes on retirement accounts.
Of course, you can take more than the RMD out of your retirement plan, and many do. However, you don’t have the option of taking less than the RMD.
Factoring in your RMD obligation is a cornerstone of any effective retirement financial plan.
When Must You Take RMDs?
Prior to the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, retirees had to take RMDs by the age of 70 1/2. However, the SECURE Act and SECURE Act 2.0 increased that age based on longer life expectancies. Now, individuals are required to take the RMD by April 1 of the year in which they turn 73, increasing to 75 in 2023. This is true even if you are still working.
Which Retirement Accounts are Affected?
Virtually all retirement accounts are subject to RMDs. These include employer-sponsored retirement plans, such as 401(k)s or 403(b)s, as well as traditional IRAs and IRA-based plans, such as SEP-IRAs, SARSEPs, and SIMPLE IRAs.
While RMDs apply to Roth 401(k)s, they do not apply to Roth IRAs while the owner is still living. If the owner dies, the distribution rules will apply to the beneficiary of the Roth IRA.
A spouse, unlike any other beneficiary, can transfer the retirement account into their own name after the plan owner’s death. Doing so automatically updates the RMDs according to the spouse’s date of birth. This means that a spouse beneficiary who is younger than the deceased owner can leave the money in the retirement account until April 1st of the year in which they reach age 72.
What About Multiple Retirement Accounts?
It’s not unusual to have multiple retirement accounts. Generally speaking, to satisfy the RMD for all your accounts, you will first need to calculate the minimum distribution for each one. Then, you can either take your RMD from each account as calculated, or withdraw the total required amount from the account(s) of your choosing.
How are RMDs Calculated?
The IRS uses the Life Expectancy Method as its primary calculation of RMD amounts. In simplest terms, the IRS will begin with your IRA account balance as it appears on the final day of the prior year and divide it by your “life expectancy factor.” This factor is derived from the appropriate life expectancy table. The tables are different if you have an inherited beneficiary IRA vs. your own account.
It’s very important to use the correct life expectancy factor when taking your RMD as penalties are stiff. Working with a financial advisor is the best way to avoid a costly mistake.
Roth Conversion Strategy
For those under age 72 who are not yet taking RMDs, a Roth conversion strategy may make sense. This strategy involves taking some money out of a traditional IRA and converting it into a Roth account. Taxes would be paid in the year the distribution is taken. However, once it is moved into a Roth, required distributions cease. This means that the funds can grow tax-deferred and come out 100 percent tax-free whenever you want them. You can also opt to pass the account on to your beneficiaries to further maximize the benefit.
The best time to implement a Roth conversion strategy is when your income is the lowest, which is usually at the start of retirement. However, there are other variables to consider. Our wealth advisors all take great care to recommend the best course of action around this strategy with your retirement goals in mind.
What are the Penalties for Not Taking RMDs?
If you don’t take the RMD by the deadline, the penalties are a whopping 50 percent tax on the amount not withdrawn. That also applies to failing to withdraw the full amount or failing to withdraw by the deadline.
One of the benefits of working with an advisor is that we will calculate the RMD for you, and we’ll make sure you take that distribution before the end of the year.
Working with EP Wealth means you get the support of a CERTIFIED FINANCIAL PLANNER ™ and excellent resources such as our retirement planning guide , a tool we use to help you identify how much income you need to maintain your living standard in retirement. It also provides key tools for managing the risk associated with investments and unexpected life events. Most importantly, it helps maximize your enjoyment of life!
After all, you don’t want to work forever. For more information about retirement plans, contact EP Wealth Advisors today. We’ll put together a plan suited to your individual needs and financial goals.