October is the month we officially kick off the Required Minimum Distribution (or RMD) process for most our clients.
First of all, what’s the RMD?
The Required Minimum Distribution is the withdrawal the IRS requires you to take from your IRAs and other retirement accounts once you’ve reached 70 1/2. (As always, a few exceptions apply, so non-clients should speak with their financial advisor regarding their personal situation).
Is it something I should dread?
Not at all. Some clients ask us about the RMD like it’s some big, terrible thing. Actually, it’s pretty easy and not too painful. You’ve been deferring tax on your retirement accounts for years and years (heck – for decades!) and now the IRS says, “enough is enough.” It wants you to start taking out money, little by little, so it can capture the taxes due.
Is it some huge amount?
Believe it or not, it’s actually quite reasonable. When you turn 70 1/2 – the first year you’re required to withdraw money – you have to take out about 3.6% of your account value, based on the previous year’s ending market value. You might notice that the figure is very close to the 4% sustainable withdrawal rate, which is our industry’s rough estimate of the amount you can withdraw each year in retirement without running out of money. The percentage you need to withdraw goes up each year as you age.
Do I have to spend the money?
Not if you don’t need to. The only requirement is that you withdraw it from your retirement account and include the amount withdrawn in your taxable income for the year. Many of our clients who don’t need the money to spend just ask us to deposit it to their personal (non-retirement) account for continued investment. Some clients put the money aside to fund an upcoming trip, while others choose to gift it to their grandkids’ college accounts, or give it to charity. Most people, of course, spend the funds over the coming year as part of their retirement income flow.
Can you help me with my RMD?
Of course. We routinely calculate the required withdrawal amount and oversee the RMD process from start to finish for clients. It’s important to cross your t’s and dot your i’s because there’s a big 50% IRS penalty on mistakes.
Anything else I should know?
Be aware that no withdrawals are required from Roth IRA accounts, while special rules apply to inherited IRAs, 401(k)s and other workplace plans if you’re still working, and IRAs with spousal beneficiaries more than 10 years younger.