Friday 500 – RMDs Explained
I don’t like being told what to do. Maybe you can relate. But sometimes you just have to face the music. I’m talking about Required Minimum Distributions (RMDs). It is the government’s equivalent of telling you what to do. And if you don’t, you’ll paya penalty. A bag of lemons if I’ve ever seen one. Luckily, I have a good recipe for lemonade. Required Minimum Distributions are a topic we cover in our educational events and work within our income plans not because we want to, but because we have to.
The RMD was established as a way for the government to start taxing tax-deferred accounts when people reach a certain age. That age used to be 70.5 years old, was changed to age 72 thanks to the Secure Act, and it is currently set at age 73 after the passage of the Secure Act 2.0. In 2033, it will change again, extending to age 75. The RMD is required from IRAs, SEP IRAs, Simple IRAs, 457 plans, 403(b)s, and 401(k)s. There is a lot of alphabet soup going on when titling the various plan offerings out there, but most tax-deferred vehicles will need to have a plan for taking your RMDs in retirement.
The RMD starting at age 73 is 3.77 percent. The 3.77 percent is actually a function of dividing 100 by the remaining life expectancy of a 73-year-old, which is 26.5 years. Every year that your life expectancy number decreases results in an increase to the percentage you must take out of your qualified accounts as a distribution.
The percentage increases to 4.95 percent at age 80 and 8.2 percent at age 90 are examples of the increases. Of course, you are also able to take out more than the minimum, but you must at least take out the minimum or the IRS will charge you a 25 percent penalty.
That explains the percentage, but on what value do you calculate the percentage off of? You will receive your end of year statements as of December 31st for the given year; the account balances in your qualified accounts will be aggregated to determine the total balance that you will need to take the RMD from. Each custodian or institution you work with will provide you with a number you need to take, but this can be taken from one or all of the accounts and that is a part of the planning we would help you do here at FWD. If you have three accounts totaling $100,000 each, then you would need to take 3.77 percent of $300,000 if you’re age 73. You could take that all from one account, half from two, or split it up among all three.
A strategic way to take your RMDs includes pulling your distributions each and every year from the best performing account executing on the concept of selling high. We would not want to take distributions from accounts that have fallen if we can help it. In that scenario we do not want to sell low, if you will.
RMDs are required, and we must adhere to the IRS guidelines in order to avoid penalties, but the best results can come from planning ahead for your RMDs and incorporating them into your written retirement plan in the most efficient way possible!
—Billy Voyles, Founder & President of Fundamental Wealth Designs
