Required Minimum Distributions - All you need to know!

David Larson |

Are you like many retirees, who have saved significantly into your pre-tax IRAs or 401(k) plan at work?  You likely depend on these accounts for your retirement income, and they represent a sizable percentage of your net worth.   If you are 72 or older this year, now is the time to structure your plan for your required minimum distributions. Even if you are younger than 72, you can still benefit by planning in advance.

By saving over the years, you have successfully climbed to the top of the mountain. Now is time to make sure that you get down safely and draw down your funds the right way to minimize risk and taxes. You have spent your whole life accumulating, But do you have a plan for drawing down your retirement accounts in the most tax-efficient manner?

Many investors believe that they do not have options or flexibility. They also do not take the time to consider how decisions made now will impact future finances for you, and for your kids.

The concept behind your minimum distributions is that our government feels they have been very generous over the years by allowing you to grow your retirement funds in a tax-deferred manner. Now Uncle Sam wants to get paid, so you need to begin withdrawing your funds, or be subject to a penalty that can be as high as 50%. You do not want to pay this penalty!

Several strategies may be appropriate for you, and we are here to guide you to the best decisions. First off, here are some key numbers:

In the year that you turn 72, you must begin taking distributions from your pre-tax IRAs. If you are still working and do not have ownership interest in the company, then you may be able to postpone taking distributions from pre-tax money held in your company 401(k).

To give you some context here, you do not need to draw down your entire account. When you are 72, you need to withdraw approximately 3.91% of your account’s value, based on the prior-year December 31 value.  This number gradually increases as you get older. It is just over 5% at age 80, and about 9% at age 90.

When you pull this money out of your account, it is taxed as ordinary income and will increase your taxable income for the current tax year.

While you do have to withdraw money from your accounts, you do not have to spend it, of course.  If you do not need these funds, consider transferring them to a taxable investment account once you pay the taxes on the amount withdrawn.

If you are charitably inclined, you should also seriously consider qualified charitable distributions. These distributions count toward satisfying your RMD, but are not taxable to you.

If you pass away, your spouse can most likely transfer your IRA into their IRA and continue taking distributions from the account.

If your children or a non-spouse are beneficiaries on the account, then the account must be liquidated within 10 years from the date of your death.

Often, investors consider Roth conversions in retirement. You are allowed to make Roth conversions after age 72. However, you are not allowed to convert your minimum distribution amount into a Roth.

These are just a few of the most important facts regarding required minimum distributions. You should have a clear strategy that is thoughtful and proactive to make sure that you keep more of your money.

Head on over to the Guides page on our website to download one of our free resources, Five Tax Strategies Retirees Often Overlook, or Six Mistakes Grandparents Often Make. You can also watch our video for additional information on Qualified Charitable Distributions here. And remember, education is worthless without the willingness to act, be proactive and plan your financial future with confidence.