Facts About Required Minimum Distributions
For years, Americans have been afforded the opportunity to save for retirement on a tax-deferred basis in accordance with Internal Revenue Service guidelines. But those same guidelines mandate a point in time when you must begin taking withdrawals from your tax-deferred individual retirement accounts and 401K retirement plans. Required Minimum Distributions, or RMDs, represent amounts you must withdraw from your retirement accounts beginning when you reach the age of 70 ½. This article discusses key facts about required minimum distributions and how they can affect your retirement and tax planning.
The rules apply to the following types of retirement plans:
The amount of the required distribution is calculated as a percentage of your retirement account balance. Distribution rates start at about 3.6% and increase annually. Distributions must be taken by December 31 of each year. However, your initial distribution can be delayed until April 1 of the year after you turn 70½. Note that such a delay will result in you having to take two RMDs in one tax year.
A calculation is made for each of your individual retirement accounts, but the amount of the distribution can be withdrawn from a single retirement account or a combination of retirement accounts. If you own a 401K or similar account, the distribution must be calculated separately for that account and the required distribution must come from the investments in that account.
Because you will be withdrawing from a tax-deferred account, the amount of the distribution will be taxable as ordinary income. Failure to take the full amount of the required distribution may result in tax penalties of up to 50% of the amount of the required distribution.
The annual distribution can potentially move you into a higher tax bracket or affect the taxability of your Social Security payments. As a result, you may want to consult with your tax or financial advisor in order to fine tune your financial planning.
You may find that you do not have an immediate need for funds from an annual RMD. In this case, the amount of the distribution can be moved to suitable investments in a taxable investment account.
About Wealth House:
Headquartered in Naperville Illinois, Wealth House LLC provides integrated solutions for wealth, tax and insurance management. If you are retired, talk to one of our financial advisors to find out how we can help you plan for and manage the required minimum distribution process. We can explain options available to potentially lessen the tax impact of the distributions.
Contact us today to see how we can help you live your financial dreams!