‘Tis the Season for RMD

Tax-sheltered accounts such as individual retirement accounts (IRAs) are a good way for investors to build their nest egg while deferring taxes. However, Uncle Sam wants his cut of your income eventually.

Thus, after you turn a certain age, you are required to take a minimum amount out of your retirement account. This required distribution is aptly named the required minimum distribution (RMD). The rule applies to accounts like the various types of IRAs such as traditional, rollover, SEP, and SIMPLE, as well as employment-related retirement accounts like a 401k.

Many people like to take their RMDs at the end of the year to give their IRAs the full year to grow. Thus, December is usually a busy money for RMD transactions. Others like to take their RMDs earlier to get them out of the way lest they forget an incur a penalty.

When You Have to Begin to Withdraw

The government requires those born in 1950 or earlier to take their first RMD by 4/1 in the year after they reached age 72. For example, if you were born in 1945, you would have turned 72 in 2017, and your first RMD would have to be taken by April 1, 2018. Thereafter, starting from 2019, you would need to take your annual RMD by 12/31 of each year.

Due to a recent law change, the threshold age has increased to 73. If you reach 72 after 2022 (i.e., you were born in 1951 or after), then you don’t have to take your first RMD until 4/1 of the year after you reach 73. Thus, if you were born 1951, you will reach 73 in 2024, and your first RMD is due by 4/1/2025.

Of course, the RMD is the minimum amount you have to take. If you wish to take out more than the minimum, it is totally fine. There’s also no limit on how many times you can take a distribution per year. Uncle Sam only cares about taking his cut of whatever amount you take out, so you will have to pay federal and state income taxes on the distribution. If you live in a state with no state income tax, congratulations, you only owe federal tax on the distribution.

You can elect to have taxes withheld, at a rate of your choice, and receive a net amount. Some people like to do this to reduce their chances of incurring a tax penalty. Or, you can just take the entire amount and then pay taxes later.

Not Bound to Take the Minimum

If you are bullish on the stock market, and you don’t need the money, then it makes sense to take just the minimum required amount and let the rest of the money continue to grow, especially if taking out more would push you into a higher income-tax bracket.

In today’s digital age, it’s quite easy to link your IRA account to a checking account or another brokerage account so you can directly transfer the RMD to another account. The distribution usually lands in the destination account the next business day after you initiate the transfer. Or if you prefer to do it the old fashion way, you can also request a check be mailed to you, but that will take longer.

If you haven’t reached the RMD age yet, but you want to take out money anyway, as long as you are age 59.5 or over, you can withdraw money from your IRA without penalty, as long as you pay taxes.

If you are below that age, you will have to pay a 10% early-withdrawal penalty. However, there are exceptions. The IRS permits you to take early distributions if you use the money for certain approved purposes. Some examples are if you need the money to pay medical bills or pay for your children’s higher-education expenses.

The IRS also provides a loophole to allow you to take money out once per year without penalty if you redeposit (or rollover) the money into another IRA within 60 days. Any money you take out needs to be redeposited into a new rollover IRA account. Effectively, this allows you to borrow from your tax-deferred savings account.

The money is your hard-earned savings. You have the freedom to choose how much to take out and what to use it for. Choose wisely.

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