If you have tax-deferred retirement accounts, you’ll need to take required minimum distributions (RMD) eventually. What yours will look like is determined by a number of factors, including your age and account balance. The IRS requires you to report this distribution on your annual taxes, so it has to happen by the end of each calendar year. Most retirees collect their required minimum distributions either annually, quarterly or monthly, with this decision revolving around what your financial plans look like. So long as you withdraw the minimum required amount by Dec. 31, the tax implications are unchanged.
What Are the Required Minimum Distributions?
A required minimum distribution is the amount of money you must withdraw each year from certain tax-advantaged retirement accounts. You can take out more than your RMD, but you must withdraw at least this much each year. The amount of your required minimum distribution is determined by your age and savings, and taxpayers can calculate it each year using the IRS’ Uniform Lifetime Table.
For anyone who turned 72 in 2022, they have until April 1, 2023, to take their first required minimum distributions (RMDs). However, this age requirement has been delayed until age 73 in 2023. The SECURE Act increased the age requirement for RMDs from 70.5 to 72 in 2019. And now, SECURE 2.0 has delayed it again from 72 to 73.
The purpose of an RMD is so that the IRS can eventually collect the taxes that it deferred when you made contributions to your various retirement accounts. It applies to accounts such as 401(k)s, IRAs and almost any other form of retirement account on which you don’t pay taxes. The only significant exceptions are Roth IRAs and other similarly situated accounts.
You must calculate a required minimum distribution for each retirement account in your name. This means that if you have three different qualifying retirement accounts, you must calculate the required minimum distribution for all three accounts. If you fail to withdraw (and pay taxes) on a required minimum distribution, you can be taxed at up to 25% of the required amount. (For example, if you were required to withdraw at least $10,000 and did not do so, you can face a tax bill of up to $2,500.)
You can use an RMD however you see fit within the rules. The government just wants to make sure you eventually pay taxes on this money. The only restriction is that you cannot reinvest it in a tax-advantaged retirement account.
An annual withdrawal plan means that you calculate and withdraw your required minimum distribution in one lump sum each year. This is a perfectly acceptable approach to accounting since your required minimum distribution is set by a predetermined formula. You calculate it based on the value of your retirement accounts as of December 31 the year before and using the Uniform Lifetime Table that the IRS releases for each year’s tax filings.
So, for example, to calculate your RMD for 2023, you would use the value of your retirement accounts as of December 31, 2022, and the Uniform Lifetime Table applicable to 2023.
Most taxpayers who choose to make annual withdrawals do so either at the beginning or at the end of each tax year. This is a matter of personal accounting since you can withdraw this money at any time. The one exception is that in the first year that you qualify for a required minimum distribution, you must begin making these withdrawals by April 1. For all years afterward the IRS has no deadline other than the end of the year.
Whenever you choose to withdraw your minimum distributions, there are pros and cons to the annual approach. The benefits to annual withdrawals can include:
However, there are some downsides to annual withdrawals too. Those can include:
The other common approach to required minimum distributions is for retirees to take this money either every month or every quarter. As with annual distributions, there is no best way to handle this money. Some retirees prefer taking a lump sum distribution each year. Others prefer a series of smaller monthly withdrawals. It’s all up to you.
Readers should note that even this is not the only option. You can make distributions as frequently as your portfolio will allow transfers. However, monthly is the most frequent common approach.
The benefits of a monthly or quarterly approach can include:
Some potential downsides to a monthly or quarterly approach can include:
Ultimately, this comes down to the choice that’s best for your finances. In most cases we can recommend framing the issue this way: Your money has the most potential for growth if you take your entire minimum distribution at the end of each calendar year. However, personal budgeting may be easiest if you take your minimum distribution in 12 monthly portions.
If you do take your minimum distribution at the end of the calendar year, make sure you set up an automatic withdrawal. Even professional brokers can get distracted around Christmas and New Year’s, and you don’t want to discover that your sell order got held up by the holidays.
You can take your required minimum distribution at any point, so long as it happens before the end of the year. Most retirees either take their money in one lump sum at the end of the year, to give it the most time to grow tax-free. Others withdraw their money each month, to give themselves a regular stream of income.
Tips for Retirement Planning
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