Retirement accounts such as 401k’s, 403b’s, and IRAs are a great way to save for retirement. Such accounts are funded with pre-tax dollars, which grow tax-deferred, and investors can enjoy a tax break during their working years.
However, once you are retired and reach the age of 72 (the age requirement increased in 2020 from 70 ½), you must start withdrawing a minimum amount from your retirement plan. This federally mandated distribution is referred to as a required minimum distribution (RMD). This distribution can occur at any point within the calendar year in which you turn 72 and is considered a taxable event.
The RMD is calculated using a percentage of the retirement account’s previous year-end value and gradually increases over time. Below is the IRS RMD calculation table:
We took the factors provided by the IRS in the table above and turned them into percentages for easier understanding.
Investors with multiple retirement plans may be able to consolidate their RMD requirements as long as the plan type is the same. For example, if you have three IRAs, you may take all three account's RMDs from one IRA rather than from each account. However, if you have a 403(b) and an IRA, the RMDs cannot be combined.
RMDs offer a variety of disbursement options and flexibility. For example, some investors choose to break their RMDs into monthly payments, while others prefer to receive them as one lump sum. Investors can also re-invest their RMDs into non-retirement accounts or make qualified charitable donations with their proceeds. Your financial planner can help you decide what options suit your needs best.
We hope this summary gives you a stronger understanding of RMD requirements and options. If you have questions regarding your specific RMD obligations, don't hesitate to contact your financial planner.