Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMD) are, as the name indicates, minimum annual distributions that must be withdrawn from an IRA, as required by the IRS, beginning with the tax year within which the account holder turns 70 ½. The IRS requires these annual distributions to help ensure that account holders don’t simply continue to accumulate money in retirement accounts, thereby deferring taxation, forever. Uncle Sam wants his cut (read: tax revenue) of the growth in your IRA!
The RMD is calculated in January of each year and is based on the account value as of the last day of the prior year and the account holder’s life expectancy per an IRS-provided table. For example, the joint life expectancy of a married 70 ½ year old is 27.4 years and that number would be divided through the December 31 account value to determine the current year’s RMD. Schwab provides Yeske Buie with a report containing all RMD amounts for our clients for that year at the beginning of February. Once we receive this report, we ensure it includes all RMD accounts – including first year RMDs for clients who recently reached or will reach age 70 ½ before year’s end – then we jump into action.
First, the Associate Financial Planners (AFPs) review all client accounts subject to RMDs to determine: the amount of dividends and capital gains distributions credited to the account in December of the preceding year, the RMD amount, any planned spending in the coming year, and the current cash balance in the account. If necessary, the AFPs will then place approved trades to raise the cash balance to the necessary amount.
Once the cash is raised, the RMD is distributed in one of three ways (taxes can be withheld from these distributions, or not; it’s not a requirement), according to client preference and spending pattern:
- If the client would like the RMD distributed to his/her taxable brokerage account to be used for annual Safe-Spending, the RMD is transferred in one lump sum.
- The RMD can also be transferred in one lump sum to a checking account for the client’s use throughout the year.
- If the client would, instead, prefer to receive monthly distributions to a brokerage or checking account, a recurring, monthly MoneyLink transfer will be set up.
As client RMDs are distributed in the early part of the year (and throughout the year for monthly distributions), the AFPs update the Yeske Buie internal tracking mechanism. Because RMDs must be distributed prior to the end of each year, we carefully track the status of each RMD each year.
In November, the Yeske Buie team reviews the list of all client accounts with RMDs again. This time, to ensure that either: the RMD was distributed early in the year or; the client’s regular spending has (or will by December 31st) satisfied the year’s RMD. If, for whatever reason, additional withdrawals need to be made to satisfy a client’s RMD, the client will be contacted by his/her AFP in order to do so.
It’s important to note three things:
- RMDs cannot be converted to a Roth IRA tax-free
- You can withdraw more than the RMD amount if needed or if provided by your Annual Safe-Spending Target
- Roth IRAs are not subject to RMDs
We’re expecting the RMD report from Schwab at the beginning of February and will begin the process described above. Please don’t hesitate to contact us if you have any questions about RMDs!