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What is Required Minimum Distribution?

Following years of hard work and consistently saving a portion of your income, you've reached the age of retirement. Now, it's time to strategize how you'll withdraw funds from your savings to cover your living expenses during retirement. The IRS mandates that individuals with qualified retirement accounts commence mandatory withdrawals once they turn 72, referred to as Required Minimum Distributions (RMDs). By understanding the fundamental guidelines for RMDs, you can devise a plan to optimize your distributions and mitigate the impact of taxable withdrawals.

A required minimum distribution (RMD) is the minimum amount that a qualified retirement participant must take from their retirement account after attaining the required retirement age. The SECURE Act raised the retirement age for taking RMDs.

It was formally 70 and a half for the period before December 2019 but is now age 72 starting in 2020. After reaching 72, the government requires account holders to withdraw a minimum amount from their tax-deferred retirement savings account. It could be from a 401(k), IRA, 457, 401(b), SEP IRA, and SIMPLE IRA. For each withdrawal, you must pay taxes to the IRS for each year after you reach 72. Usually, investment gains in qualified retirement plans grow tax-free until they are withdrawn. Enforcing RMDs is a way for the IRS to ensure taxes get paid on the investment gains accumulated in a retirement account.

Before the enactment of the SECURE Act, the IRS required individuals who turned 70 and a half to take RMDs by April 1 of the following year. However, with the 2020 legislation, individuals must take their first RMD by April 1 of the year after they turn 72. Thereafter, they must take RMDs on December 31 for every year after the first RMD.

When calculating your RMD, you must base your calculations on the closing balance of the account on the last day of the previous year. To calculate the RMD, you take the prior year’s account balance divided by the appropriate life expectancy factor in the IRS RMD worksheet.

If you don’t take the RMD at all or maybe take the amount below the mandatory amount then the IRS imposes a 50 percent penalty on the amount not taken. You will still pay ordinary taxes on the total distribution, based on your tax bracket.

For other retirement accounts such as 401(k)s, you must take the RMD from each specific account as required. You should contact a professional financial advisor if you’re confused about how to proceed with your RMD with multiple retirement accounts.


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