But those pesky little “required minimum distributions,” or RMDs, aren’t really that complicated, and they are truly of critical importance. Mess one up and the IRS will charge you a whopping 50% penalty.
Here’s five things you really ought to know about your RMDs.
1. What are they?
RMDs, or Required Minimum Distributions, are amounts the IRS says you have to take out of your IRAs and other retirement plans each year once you turn 70 1/2.
2. How will I know how much to take out?
Don’t worry, we’ll actually alert you the year before you first start RMDs so there’s no danger of missing the deadline. We’ll tell you how much you need to withdraw before the end of the first year, and each year thereafter. Plus, we’ll work out any tax withholding and actually transfer the required amount into your bank account, so the whole process will be quick and painless.
3. What about my Roths, Inherited IRAs, 401(k)s and other retirement accounts?
Just to keep you on your toes, the IRS has different RMD rules that apply to different types of accounts (what a surprise!). But seriously, that’s not a problem. We’ll sit down with you when you turn 70 1/2 to sort out all the twists and turns.
4. Is it true the IRS will make me take out a huge amount of money?
Believe it or not, the IRS calculations are pretty much spot-on in terms of what to take out.
The required withdrawal amount is uncannily close to what many financial advisors would recommend you can take out each year without your money running out prematurely. (Hey IRS! What do you know? We just gave you a compliment!). For example, if your IRA is worth $100,000, the IRS says you must withdraw $3,649.64 in the year you turn 70 1/2. That’s about 3.6% of the account value, which is mighty close to the “rule-of-thumb” 4% withdrawal percentage.
5. What if I need to take out more?
Not a problem. When you take out more than what’s required, you make Uncle Sam a very happy man indeed. The more you take out, the more tax you pay, because your IRA funds are not taxed until you withdraw them. So go ahead, make their day. Take out all you want. After all, it is your money.