Something we dont talk about as much is taking your money out when retirement finally arrives.
But there are also penalties if you dont withdrawenoughmoney once you turn 73.
What Is a Required Minimum Distribution?
You get the cash and Uncle Sam gets income tax on the withdrawal.
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Thats why most retirement accounts except Roth IRAs have required minimum distributions.
Did you know?
How much youre required to withdraw changes from year to year and is based on IRS life expectancy tables.
8 Facts you better Know About Required Minimum Distributions
Required minimum distributions arent inherently bad.
Most of us want or frankly, need to use theretirement money we saved up for years.
You might even consider yourself lucky.
Unfortunately, theres no avoiding taxes when RMDs kick in.
All Retirement Accounts Have RMDs Except One
All retirement accounts whether individual or from an employer have RMDs.
There is one exception:Roth IRAs.
Roth IRAs dont require RMDs while the account holder is alive.
Because these variables change every year, so does your RMD amount.
However, the same rule doesnt apply to defined contribution plans, such as 401(k) plans.
If you have multiple 401(k)s, RMDs must be calculated separately for each one.
it’s possible for you to also do a Roth IRA conversion from your traditional IRA.
But remember, youll pay income taxes when you convert from a traditional IRA to a Roth.
Knowing When to Take Your RMDs Is Important
Its important to know your required minimum distribution deadlines.
Otherwise youll face a hefty fee.
You should also contact your retirement plan administrator and let them know when you plan to take RMDs.
Some people dont have to worry about RMDs because they need the money sooner.
Remember, you might choose to start taking penalty-free withdrawals from a retirement account as soon as age 59.5.
To figure out how much money youll owe in taxes,find your tax bracket.
Your required minimum distribution also counts toward your annual taxable income.
This can affect the taxes you pay for Medicare and Social Security.
Youll never pay taxes on Roth account withdrawals because the money in these accounts has already been taxed.
Roth withdrawals dont count toward your taxable income, either.
How Do You Calculate Your Required Minimum Distribution?
Start by adding up all your IRA balances as of Dec. 31 of the previous year.
Next, locate your age on the IRS Uniform Lifetime table and the corresponding distribution period.
Finally, divide your account balance by the distribution period factor in the chart.
(Note: You will need to figure the RMD for each 401(k) account separately).
Lets imagine Marcos is 73 and has $100,000 in his traditional IRA on Dec. 31, 2021.
Here is one small caveat to all this.
And as weve mentioned before, a simple mistake can cost you big.
Its wise to use a RMD calculator so you dont withdraw too much or too little from your accounts.
Need help reporting an RMD on your tax return?
Consult a professional tax advisor.
you might also work with acertified financial plannerto determine the best way to spend or invest your withdrawals.
The best source of information about RMDs isIRS Publication 590-B.
It contains detailed instructions, worksheets and up-to-date distribution period tables based on life expectancy.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
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