By Mike Hoelzl
If you’ve spent years building your retirement savings, there comes a time when the IRS requires you to start taking some of that money out. This is called a required minimum distribution, or RMD. Simply put, it’s the minimum amount you need to withdraw each year from certain retirement accounts, such as traditional IRAs, 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs.
The question I often get is, “Why do I have to take money out if I don’t need it?” The simple answer is taxes. Many retirement accounts allow you to put money away without paying taxes on it right away. Your savings can then grow tax-deferred for many years. Eventually, the IRS requires you to start withdrawing some of that money, and those withdrawals are generally taxable as ordinary income. Think of an RMD as the point when the IRS begins collecting some of the taxes that were postponed while you were saving for retirement.
It is important not to forget about your RMD. If you don’t take the full amount you’re required to withdraw, the IRS may charge a penalty on the amount you missed. The penalty is generally 25% of the amount not withdrawn, but it may be reduced to 10% if the mistake is corrected within the required time frame. Fortunately, RMDs don’t have to be stressful. With a little planning — and even setting up automatic distributions (annual, quarterly, monthly, etc.) — we can help make sure the right amount comes out on time each year.
So how do you know how much to take? The calculation is fairly simple. Your RMD is generally based on the value of your retirement account at the end of the previous year and the life expectancy number provided by the IRS RMD table. An example: If your account was worth $500,000 and your IRS factor was 25, your RMD would be $20,000 for the year. Your actual amount will depend on your individual situation, but you don’t have to figure it out alone. We will help you determine the correct amount and make your RMD part of your overall retirement income plan.
Mike Hoelzl is a Vice President at Landaas & Company