Do you have retirement savings? Well, be careful, because there’s a rule you can’t ignore. The famous Required Minimum Distributions (RMDs) are very important if you have savings plans like a 401(k) or IRA accounts.
In short, these are the minimum amounts that the IRS forces you to withdraw every year from those savings, no matter what. Why? Well, really to make sure you pay taxes on that money before you spend it.
What exactly are RMDs in retirement?
Imagine you have a giant jar full of candy that you’ve been saving for years. Well, the IRS says: You can’t leave that jar full forever. You have to start eating some candy every year and, in addition, pay me a part for each one you eat. Sounds fair, right? Well, it depends.
The curious thing is that it doesn’t matter whether you really need that money or not. By law, once you turn 73, you have to start making these withdrawals. Oh, and if you were born in 1951, note this date: April 1, 2025. That is the deadline to make your first RMD.
Who does this affect?
Here’s a quick list so we don’t get too confused:
- If you have a traditional IRA account.
- If you use SEP IRA or SIMPLE IRA accounts.
- If you participate in retirement plans like 401(k), Roth 401(k), 403(b), or 457(b).
Now, pay attention to this: if you work for a company and have an employer-sponsored retirement plan, you can postpone your RMDs until you retire. However, with one exception: if you own more than 5% of the company, the rules change.
By the way, Roth accounts within a 401(k) or 403(b) were also subject to these rules in 2023. But, starting in 2024, good news! These accounts will be exempt from the RMD as long as the owner is still alive.
How is the amount you should withdraw calculated?
The calculation, although it sounds complicated, makes sense. You have to divide the balance of your account at the end of the previous year by your current life expectancy. And how do you know what your life expectancy is? Rest assured, determining your life expectancy doesn’t require divination. The IRS has specific tables that they publish on their website to help you with this.
It’s a somewhat technical formula because it depends on your age, gender, and some statistics that seem taken from an advanced math course. But, in short, the younger you are at the time of calculation, the smaller the percentage you have to withdraw.
Despite the topic’s technicality and potential boredom, it’s important to pay attention.Ignoring the RMD can be expensive because the IRS applies severe penalties if you don’t comply with the rules. So, if you have doubts, talk to your financial advisor or check the IRS guides directly. Isn’t it wiser to exercise caution rather than risk encountering issues with the tax authorities?
