As you get older, it’s important to have a plan for taking required minimum distributions (RMDs) from your qualified retirement accounts. These are mandatory withdrawals that the IRS requires you to take every year once you reach age 73, starting January 1, 2023 according to the new Secure Act 2.0. Starting January 1, 2033, the RMD age is set to increase again from age 73 to 75. The amount of your yearly RMD depends on your age and how much money is in your IRA or 401(k). If you don’t take out enough money each year, there could be penalties involved—but if you take out too much, there might be even worse consequences. So what’s an investor supposed to do? Don’t worry; we’ve got some tips for making sure you’re getting the most out of these tricky withdrawals:

Tip #1: Know which retirement accounts require RMDs

Before you begin, it’s important to understand the basics – which retirement accounts require RMDs. Here are the accounts affected by RMDs:

• Traditional IRA
• SIMPLE IRA
• Rollover IRA
• SEP IRA
• 401(k)
• SIMPLE 401(k)
• 403(b)
• Governmental section 457 deferred compensation

Roth IRAs don’t require RMDs for the account owner.

Tip #2: Determine Your Required Beginning Date

Minimum distributions must be made on or before December 31st of each year.

For IRAs, you must take your first RMD by April 1 of the year following the year you turn age 73.This applies to everyone whether or not the person is retired. The second distribution must be made within the same year before December 31st.

If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. If you turn 73 in 2023, it means you were 72 in 2022 and thus subject to the age 72 Required Minimum Distribution (RMD) rule applicable in 2022.

If you turn 72 in 2022:

• Your first RMD is due by April 1, 2023, based on your account balance on December 31, 2021, and
• Your second RMD is due by December 31, 2023, based on your account balance on December 31, 2022.

Distributions may be taken in lump-sums or taken in pieces throughout the year as long as the correct total RMD amount is taken by the due date.

Distributions are generally taxed as income and any distribution made through December 31 will be taxed in the current year.

Required beginning dates for RMDs on your employer-sponsored plan(s) will vary so we suggest contacting your employer-sponsored plan administrator for specific rules on each plan. It’s important to note that you must take each RMD for a qualified employer-sponsored plan from that specific plan. You may not mix RMD amounts from your IRA(s) with your qualified employer-sponsored plan(s).

Tip #3: Calculate your RMD correctly

Your RMD is based on your age and the account balance at the end of the prior year so it’s important to re-calculate your RMD every year.

For IRAs, you – the account owner – are responsible to calculating and taking your RMDs. The IRS has developed a worksheet to help people calculate RMDs here.

If you have a qualified employer-sponsored plan, your employer is responsible for calculating the RMD amount and distributing the RMD.

 Tip #4: Consider all your retirement accounts

If you have multiple IRAs, you want to calculate the RMD from each IRA and add them together to determine your total RMD due. You may take the total distribution from one or more IRAs to meet the RMD due for that particular year.

However, this is not the case for qualified employer-sponsored accounts – such as 401(k)s. If you have multiple 401(k)s accounts, each plan will calculate the RMD and will distribute the RMD.

 Tip #5: Have a plan for your unused distributions

Though you must take RMDs, that doesn’t always mean you need to spend the funds you pull from your accounts. So, what can you do with the extra funds?  Here are some ideas:

• Reinvest the funds in a tax-free account – such as a Roth IRA or life insurance policy.
• Donate the money to your favorite charity or organization.
• Help future generations by setting up a college fund or Roth IRA for grandchildren.

 Tip #6: Avoid RMD penalties

If you miss the deadline and do not take your total RMD due for that year, you could get hit with a tax penalty – 25% of the amount not taken. For example, if your total RMD was $20,000 but you only took $15,000, you’d owe a $1,250 penalty plus income tax. 

Moreover, if the owner withdraws both the missed RMD amount and the current RMD amount due by the end of the second year following the year it was originally required, the penalty is reduced to 10%.

Starting in 2024, RMDs for Roth accounts in employer retirement planswill no longer be required.

Planning for your retirement income can become convoluted.  That’s why it’s important to seek the help from a financial advisor so you can ensure you are properly managing your RMDs and making the right financial decisions. Schedule an appointment with one of our qualified financial professional(s) to create a custom strategy to manage your RMDs so that your retirement plan is well-coordinated moving forward.