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Understanding Required Minimum Distributions (RMDs)

Understanding Required Minimum Distributions (RMDs)

 

If you have tax deferred qualified retirement accounts, then eventually you’ll have to start taking out RMD’s (aka Required Minimum Distributions.

Qualified retirement accounts are any retirement accounts are any of the following:

  • IRA
  • 403(b) – TSA
  • 457 – Deferred Comp
  • 401(a) – Pension or Special Pay Plans
  • 401(k)
  • And others – contact our office if you have an account not listed and you think you may need to take RMD’s

You have to take out the RMD’s starting the year that you turn 70 ½ years old.

A few notes about RMD’s:

  • The year that you turn 70 ½ you have until April 1st of the following year to satisfy that year’s RMD’s
  • For every RMD after the first year, you have until December 31st to take out your RMD’s.
  • If you fail to take your RMD’s there is a 50% tax penalty on the amount that you did not take
  • You can satisfy RMD’s for multiple accounts as long as they’re the same tax qualification (IRA, 403(b), 457, etc.).
  • RMD’s cannot be satisfied by different tax qualifications. Meaning: All of your IRA RMD’s can come from one IRA account, but you can’t satisfy your 403(b) RMD from an IRA or vice versa.
  • RMD’s cannot be converted to a Roth IRA.
  • RMD’s start at approximately 3.65% of the previous year’s account value and increase every year after that.
  • RMD’s are based on December 31st account value of the previous year. Meaning that if you have losses in your portfolio after December 31st you will be forced to sell low in your investments.
  • You do not need to take RMD’s out of Roth accounts

Most investment companies give you an option to have your RMD’s automatically taken out. We usually recommend signing up for automatic RMD’s because of the 50% tax penalty that will occur if you fail to take it out.
If your investments are market based: Because the IRS is forcing you to sell your investments based on the previous year’s account value regardless of account performance, you may want to consider using accounts that don’t have have high volatility.