Planning for Your RMDs Before Year End

If you’re about to retire, there are many important financial decisions to be made. Most people will depend on their retirement accounts to provide income for their non-working years, but how much and when you withdraw varies by individual. If you’re delaying your distributions past your retirement to maintain the tax-deferment benefits, there will come a time when you must begin withdrawing funds from your retirement savings accounts.

The rules surrounding how and when you must start taking disbursements from your retirement plans are highly complex, and the penalties are severe. Here’s a guide to how you can avoid hefty fines by making withdrawals from your accounts on schedule.

What are RMDs?

According to IRS rules, you’ll have to begin taking required minimum distributions (RMDs) from any retirement plan (except Roth IRAs) starting at age 72, whether you need the funds or not. For those individuals who attain age 70 ½ prior to December 31st, 2019, the age requirement for RMDs is 70 ½. Employer or self-employed sponsored plans, pensions, profit sharing plans, and plans for not-for-profits and government agencies are all subject to the same RMD rules.

When to Take Your RMD

You’ll need to start taking your required RMDs starting on April 1st of the year following when you’ve reached your RMD age. For example, if you were 70 ½ at some point during 2019, you’ll need to take your first RMD on April 1st of 2020. If you turn 70 ½ during 2020 or later, the first RMD is due on April 1st of the year following the year you turn 72. The deadline for RMD withdrawals for subsequent years is December 31st of each year. Therefore, if you took your first RMD distribution in 2019, you’ll need to take at least one more before the end of 2020.

How to Determine Your RMD Amount

To calculate your yearly RMD amount, divide the balances in all of your retirement plans on December 31st of the year before the withdrawal applies, and divide it by your corresponding factor in the IRS expectancy table. Even if you have multiple retirement funds, you can take your RMD from just one or any combination of your accounts. In order to avoid any confusion and mistakes, it’s best to work with your tax professional to ensure you’re using the right figures.

Don’t Procrastinate!

The regulations around RMDs are strict, and IRS takes these distributions very seriously. Once you start, you’re expected to continue to take yearly RMDs without exception, and not doing so has severe penalties. If you miss an RMD withdrawal, the penalty is a whopping 50% of what you should have taken! Since you’re required to pay income taxes on the distributions, a missed RMD means that the amount you receive from a missed withdrawal could be only a sliver of what it should have been.

With all the busyness at year-end, waiting until the very end of the year is risky. Because it can take several days, if not longer, for the transactions to process, we suggest that you finalize your RMD plans for the year by December 1st. Contact Cray Kaiser today to make your RMD arrangements before the end-of-year deadline.

Please note that this blog is based on tax laws effective in January 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.