Whether you have heard of an RMD before or maybe it just looks like another acronym to add to the list, it's time to break down what a required minimum distribution is and what it means for you.
What is an RMD?
RMD stands for required minimum distribution. A required minimum distribution is the amount of funds that you must withdraw from your retirement account each year after turning the age of 73 for those born from 1951-1959 or age of 75 for those born in 1960 or after. Calculate the RMD by dividing the account balance from close of business on December 31 of the preceding year, by the applicable life expectancy from the Uniform Distribution Table (UDT). Here is a link to calculate your expected RMD!
Who has an RMD?
Everyone who has an employer-sponsored retirement plans, including profit sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans must fulfill their RMD after they reach the age of 73 or 75. The RMD rules also apply to traditional IRAs, IRA-based plans such as SEPs, SAR-SEPs, SIMPLE IRAs and Roth 401(k) accounts. RMD rules do not apply to Roth IRAs while the owner is alive.
Why do I have an RMD?
Required minimum distributions are to collect appropriate taxes from certain tax-deferred retirement accounts. All distributions are reported to the IRS and failure to complete your RMD prior to the deadline can result in tax penalties depending on how long after the deadline the RMD is completed.
How should I use my RMD?
- You have a few different options when it comes to meeting your RMD.
- You can invest it into another taxable brokerage account.
- You can invest the funds into a 529 college savings account if you plan to help with college expenses for someone in your life.
- Spend it on current expenses.
- Donate the funds to an eligible charity with a qualified charitable donation (QCD). Gifting your RMD may also positively impact your tax position.
There are many other niche ways to satisfy your RMD for the year. Please contact your financial professional to learn about what strategy would be best for you!
When is my RMD due?
Once you are required to take an RMD, all RMDs need to be taken out by December 31st of that year. However if it is your first RMD, you may also postpone your RMD to April 1st of the year you turn 73 or 75, depending on your birth year. To ensure that your RMD is processed in time to avoid any penalties, please submit your RMD requests by December 6th.
What about RMDs for Beneficiary Retirement Accounts?
Required Minimum Distributions (RMDs) for beneficiary retirement accounts vary based on the relationship of the beneficiary to the account owner, the year the account holder passed away, and the type of retirement account. Generally, non-spouse beneficiaries must begin taking RMDs by December 31 of the year following the account owner's death and requires them to withdraw the entire balance within ten years. Spousal beneficiaries have more flexibility, as they can choose to treat the account as their own or take distributions over their life expectancy. Eligible Designated Beneficiaries can also take distributions over their life expectancy. RMDs for beneficiary retirement accounts, which does include Roth IRAs, have complex rules. It is essential you talk with a financial professional or tax preparer for guidance.
Hopefully, this information gave you a better understanding of what an RMD is. Remember to contact your financial professional for accurate estimates and assistance in completing your RMD. If you are looking for some financial help but don't know where to start, contact us today and we would be happy to point you in the right direction.
Source: LPL Financial
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC
The content in this material is for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific, individualized tax or legal advice. Neither LPL Financial, nor its registered representatives, offer tax or legal advice. We recommend that you discuss your specific situation with a qualified tax or legal advisor.