Congratulations on celebrating your 72nd birthday! Age 72 is the age at which most people must begin taking Required Minimum Distributions (RMDs) from Traditional IRA and other qualified retirement plans. SageVest Wealth Management discusses the various factors to consider about RMDs at age 72 here.
Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMDs) are the amount of money that the IRS requires you to withdraw annually from your traditional IRAs and employer-sponsored plans. RMDs act to spread your retirement savings across your lifespan, preventing accumulation of tax-deferred retirement funds as legacy assets.
Up until December 31, 2019, the year in which you were required to commence RMDs was the year in which you turned age 70 ½. If you reached age 70 ½ before December 31, 2019, you fall under the old rules and must take an RMD for 2019 and all future years.
As of January 1, 2020, the new applicable age for commencing RMDs increased to age 72. Hence, if you were younger than 70 ½ as of December 31, 2019, you just got an extra year and a half before you’re required to begin distributions.
Accounts and Plans Requiring RMDs
· Traditional IRAs.
· Simplified Employee Pension (SEP) IRAs.
· SIMPLE IRAs.
· Qualified pension plans.
· Qualified stock bonus plans.
· Qualified profit-sharing plans (including 401(k) plans).
· Section 457(b) and Section 403(b) plans.
You don’t need to take RMDs from a Roth IRA, but your future beneficiaries will typically need to do so.
To determine whether RMD rules apply to your employer-sponsored plan, consult your plan administrator or a tax professional.
How to Calculate Your RMD
For most people, calculating your RMD is straightforward. Simply divide the balance of each qualifying retirement account on December 31 of the preceding year by your life expectancy factor in the IRS Uniform Lifetime Table.
If your sole designated beneficiary is a spouse who’s more than 10 years younger, you may base RMD calculations on the longer joint and survivor life expectancy (see IRS Publication 590), potentially offering a longer payout period.
You must calculate RMDs for each qualified retirement plan. However, you can aggregate the withdrawal from any one or more IRAs (except Inherited IRAs and employer retirement plans).
How Much RMD to Take?
You can always withdraw more than your annual RMD. Note, however, that RMDs produce taxable income.
Failing to complete your RMD triggers a hefty tax penalty (50% of the difference between the RMD you should have taken and distributions actually made during the taxable year).
Your First and Subsequent RMDs
Your first RMD is due the year you reach age 72. You can elect to take it during that year, or delay it until April 1 of the following year. This date is called your ‘Required Beginning Date’.
All subsequent RMDs must be taken no later than December 31 of each calendar year, until you die, or your balance reaches zero. Thus, if you delay your first distribution, you’ll have to take two distributions in one year: your first year distribution (delayed to April 1), plus your second year distribution (by December 31).
If you continue working after age 72 and still participate in your employer’s retirement plan, your Required Beginning Date for that plan can be as late as April 1 of the calendar year following your retirement (if the plan allows this, and you own 5% or less of the company). Subsequent distributions must still occur on or before December 31 of each subsequent year.
Should I Delay My First RMD?
The decision whether to delay your first RMD is an important one, one that’s based upon your personal tax situation.
You might elect to defer your first RMD if you’ll be in a lower income tax bracket the following year e.g., due to a lower income or retirement.
Remember, however, that deferring your initial RMD means you’ll have to take both your first and second RMDs in the same year (your first RMD by April 1, and your second RMD by December 31). This ‘double distribution’ increases your taxable annual income, which may place you in a higher Federal income tax bracket and prompt additional taxes.
Income Tax and RMDs
RMDs are typically subject to Federal (and maybe state) income tax for the year of distribution. They are taxed at ordinary income tax rates, even if the funds represent long-term capital gain or qualifying dividends from stock held within the plan. In some cases, there are special rules for capital gain treatment on distributions from retirement plans.
If you’ve ever made after-tax contributions e.g., if some of your traditional IRA contributions were not tax-deductible, those contributions may be income-tax-free upon withdrawal, simply because they’ve already been taxed. However, please consult a tax advisor for more information.
Special tax rules also apply to Roth IRAs and Roth 401(k)/403(b) contributions.
The RMD rules for inherited IRAs changed as of December 31, 2019. For all inherited IRAs received as a result of death prior to December 31, 2019, the beneficiary of such inherited IRA is required to take a distribution over his or her lifetime, using an actuarial table specified by the IRS. These older rules allow the beneficiary to ‘stretch’ inherited IRA monies over his or her lifetime.
The rules are much different now for inherited IRAs received from a decedent who died on January 1, 2020 or later. Assets received in an inherited IRA must now be distributed within 10 years of the IRA owner’s death (either periodically over that timeframe or in one lump sum), with a few exceptions:
• The 10-year distribution rule does not apply to a spouse named as the beneficiary of an IRA.
• Distributions may still be ‘stretched’ over the life or life expectancy of a non-spouse beneficiary if the individual is a minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. This exception only applies to minors until they reach the age of majority, at which time the 10-year rule applies going forward.
As with all aspects of your wealth management, careful planning and knowledgeable guidance is essential to optimize RMDs. As a top-ranked, fee-only financial advisor, SageVest Wealth Management can develop a tax-efficient plan for your Required Minimum Distributions, including evaluating your options for deferring your first RMD, calculating your aggregate RMDs, and facilitating payments. Please contact us for more information about our retirement planning services.
We also recommend that you consult a tax professional for more information about your specific tax circumstances and legacy plans.