MONEY SMART By GRACE S. YUNG, CFP
Retirement Plan Withdrawal Requirements Understanding your IRA’s Required Minimum Distribution rules. As we approach the end of the year, it is a good time to review the updated rules surrounding withdrawals from your retirement plans. The SECURE Act, which took effect in 2020, made changes to the Required Minimum Distribution (RMD) rules. It is important for us to review these rules in order to satisfy the requirements and avoid having Uncle Sam become the biggest beneficiary of your retirement savings. Who Must Take Required Minimum Distributions? Anyone who has a retirement account (or an inherited retirement account) must take distributions at some point. Prior to the passage of the SECURE (Setting Every Community Up for Retirement Enhancement) Act, the age to begin required minimum distributions was 70. The SECURE act raised the RMD age to 72, allowing account holders to continue tax-deferred growth and contributions a little while longer. This also allows them to delay paying tax on withdrawals, assuming they do not need that retirement income prior to age 72. You must start receiving distributions from traditional IRAs (Individual Retirement Accounts) and other qualified plans (such as a traditional 401k) by April 1 of the year following the year in which you turn age 72, and by December 31 in subsequent years. Traditional accounts are those that defer your contributions from income taxation (depending on whether you qualify), and the funds grow tax-deferred while invested in the account. Upon withdrawal, though, the tax-deductible portions of your contribution and any earnings will be taxable as ordinary income. These plans differ from Roth IRAs and retirement accounts, where contributions go in after being taxed and the withdrawals are tax-free. There are also no required minimum distributions on Roth accounts until after the 24 DECEMBER 2021 | OutSmartMagazine.com
death of the owner, so your money can continue to grow tax-free over time—even after you turn 72. (However, note that employer-sponsored Roth accounts do have required minimum distributions). How Required Minimum Distributions Work The amount of the withdrawals you must make is based on an IRS formula that takes into account certain factors, including the balance in the account, your age, and your anticipated life expectancy. For example, to determine your annual required minimum withdrawal, you would divide the prior December 31 balance in the IRA and/or retirement plan by your life-expectancy figure that is set by the IRS in IRS Publication 590-B, Distributions from Individual Retirement Arrangements. Publication 590-B can be accessed by going to irs.gov/publications/ p590b. Because of this IRS formula, the amount of your distribution won’t necessarily be the same every year. In addition, the life-expectancy table you use can be based on different situations, depending on your particular objectives and whether you plan to be the sole recipient
of the funds in the account or instead plan to leave the remaining funds with a beneficiary. These IRS life-expectancy tables include the following options: • Joint and Last Survivor Table – This table is used if the sole beneficiary of the account is your spouse and he or she is more than 10 years younger than you. • Uniform Lifetime Table – This table is used if your spouse is not your sole beneficiary, or if he or she is not more than 10 years younger. • Single Life Expectancy Table – Use this table if you are the recipient of an inherited IRA. It is essential that you follow the RMD rules and take out your required distribution before the deadline each year. Failing to do so, or taking out less than the full amount that is required, can result in a penalty of 50 percent of the required amount that isn’t withdrawn. Because there can be so many “moving parts” when it comes to required minimum distributions, it is recommended that you first discuss your situation with a financial professional before accessing any IRA or retirementplan funds. ➝
