Five Things to Know about Required Minimum Distributions

It used to be that your 70 1/2 “birthday” was a notable time for required minimum distributions (RMD) but that date has changed! The current RMD beginning age for anyone born in 1951-1959 is the year you turn 73 and for those born in 1960 or later, is the beginning age is the year you turn 75.  Your RMD is the mandatory minimum withdrawal you’re subject to distribute from your retirement accounts; the amount is calculated based on your age and account balance. Every year you contributed to your IRA or 401(k), your assets were growing tax-deferred. As such, once you begin taking distributions from

these tax-deferred accounts, you must pay the required taxes. To help you feel confident in understanding the considerations associated with RMDs, we share a list of five things to keep in mind before you’re subject to taking the distributions.

• Timing matters
• • While age 73 (or, if born later, age 75) marks the beginning of your RMD requirements, you can choose to wait to take your first RMD as late as April 1^st of the year after you turn 73 (or 75), which can be advantageous if you’re expecting lower income in the following year. That being said, you’ll be required to not only take your first distribution that year, but also your second, which could lead to higher taxable income than if you spread it out over two years.
• Cash isn’t always king 
  • Most RMDs are distributed in cash, but they don’t have to be. You can transfer shares from your tax-deferred IRA to a taxable account, as along as the value of the shares transferred is equal to your RMD. You’ll still owe taxes on the distribution but you can save on any subsequent gains. This strategy makes sense when you transfer shares that have decreased in value because if you sell them out of your IRA, the entire value will be treated as ordinary income. However, if you transfer them to your taxable account, any subsequent gain will be taxed at the favorable capital gains rate when sold.
• You must take RMDs from IRAs and 401(k)s – and there are differences
  • If you have a 401(k) or other qualified retirement plan that you haven’t yet rolled over, you’ll want to remember that they are also subject to RMDs, and there are some differences to keep in mind. First, if you have multiple IRAs you have the flexibility to take your entire RMD from one IRA or split the amounts strategically.  With 401(k) plans, however, you must take separately calculated RMDs from each account.  On the other hand, if you’re still working at age 73 (and you don’t own more than 5% of the company), you can delay RMDs from your 401(k) until the year you stop working, which you can’t do with IRAs.
• Tax withholding isn’t actually mandatory
  • As a default, the custodian or plan sponsor will usually withhold 10% of your distribution for taxes but you’re allowed to elect 0% withholdings, which can make sense for different reasons depending on your tax situation and personal preference. Furthermore, it’s an easy change to make – simply let us know if you’d like to make a change or would like to explore the withholding elections that make sense for you.
• You can donate your RMD at any time of the year
  • Qualified Charitable Distributions (QCDs) are distributions from your IRA directly to charity that count towards your RMD but are not taxable (essentially giving you a tax deduction if you have charitable intent and usually contribute to charity). You can save money in taxes and support the causes you care about.

As always, we’re available to answer any questions you have about required minimum distributions or other considerations you encounter pertaining to your accounts, spending, taxes, and more. while planning for retirement.