The RMD: Everything You Need to Know….Nearly

I love acronyms in financial planning. They make it more efficient to talk finance, but they can also create barriers to communication, either because someone may have never heard the term, lack confidence in their understanding or usage of it, or feel intimidated when a financial pro throws the jargon around as if everyone knows. We don’t ever want you to feel like that when working with The Dala Group, so always feel free to stop us if we are using insider language.

The acronym for Required Minimum Distribution (RMD) is so universally relevant that we want to equip you with greater understanding so you feel confident when considering your options or as a party trick to impress your friends. It’s pretty simple, though. An RMD is the minimum amount of assets you are required to distribute from a tax-advantaged investment account in any given year to avoid penalties.

Whether you’ve reached your Required Beginning Date (RBD) because of the year of your birth (Ooooo, there’s another acronym we must discuss) or have inherited some of the $84 trillion dollars passing on from the baby boomer generation, you’re bound to consider the RMD financial effect.

What is the RBD?

RBD stands for Required Beginning Date, which translates to the year in which you must start your first RMD. Customarily, your required beginning date is April 1st, the year after you turn 73. Because Americans are living longer, the RBD will slowly increase over the next decade so that those retiring in 2033 will have an RBD of April 1st, the year after turning 75, thanks to the Secure 2.0 Act of 2022.

The RBD date depends on the account type in question. The ages I mentioned are for all IRAs and any dusty 401k accounts scattered about from years of job changes. If you still work and have an active retirement plan there, your RBD for that account is only April 1st, the year after you separate from your job. That rule is slightly different if you are major owner of a business and still actively working.

What if I wait until the year after I turn 73?

The tax code gives you a bit of a reprieve your first RMD year so you have time to adjust your finances, but not the second year. In subsequent years, you have to withdraw your RMD by December 31st. This is tricky water. If you wait until April 1st of the year following age 73, you have to take two RMDs that year, one for age 73 by April 1st and one for age 74 by December 31st.

Can I avoid RMDs?

You can’t avoid them in traditional IRAs and 401k, but you can minimize them. If your tax-advantaged assets live inside a Roth-style account, you have no RMD. That’s the ultimate control of your tax situation and where Roth conversions could make sense during various working and non-working years. Even so, your heirs will be required to liquidate a Roth account when it passes to them.

What’s my RMD if I inherit an IRA?

Well, that depends. The Secure Act 1.0 of 2019 introduced new beneficiary types and rules that can make it complex and warrant careful consideration. Are the assets passing to a spouse or non-spouse? When did you inherit the retirement account? Those are the most substantive variables. Spouses have the greatest flexibility to spread it out or select when to start, whereas children typically have a 10-year window to cash out and pay any taxes due.

How do I calculate the RMD?

There’s one simple factor in the division equation and one that has nuance. The simple part: what was the balance of the account at the close of December 31st, the year before? Take that value and divide it by the appropriate life expectancy factor. And that’s where it gets more complicated. Three tables exist from which to obtain your life expectancy number, and knowing which table to use isn’t always crystal clear. Luckily, in most circumstances, you’ll be using the Uniform Table; if you’re a beneficiary, the Single Life Table.

But if, for example, your spouse is more than 10 years younger than you, you can use the Joint Life Table, which produces a lower RMD. That makes sense because statistically, your much younger spouse will live longer than you will, so the tax code lets you slow roll the RMD so they have more money later. This is a common example of the nuance of the RMD calculation we run into.

What if I have more than one account?

If you have several accounts, you’ll need to plan for each of them in your RMD calculation. You can aggregate your IRAs together and take as much or as little as you want from any one account so long as the total distribution (or distro) equals the total RMD between them. However, 401k, 403b, or other workplace plans will each have separate and commensurate distributions. And it can get even more complicated with inherited IRAs.

Will I owe any taxes on my RMD?

This is usually the #2 calculation to know, and by calculation, I don’t mean the numbers. I mean, what is best in your situation? Distributions from traditional IRA and 401k accounts add to your taxable income for the year. You’ll owe taxes on that amount at whatever marginal tax bracket you fall. The lower your tax bracket, the lower the taxes.

However, there is one way to take your RMD and not pay taxes. If you’re 70 ½ , you can donate to a charity by way of a Qualified Charitable Distribution (QCD). Wow, another acronym.

What if I don’t take my RMD on time?

Good news here. Recent tax law changes reduced the penalty from 50% to 25%. The penalty is only on the amount that you did not take. For instance, if you were required to withdraw $10,000 and withdrew only $7,500, your penalty is on the $2,500 that you didn’t take. If you correct that mistake within two years, that penalty drops to 10%. At The Dala Group, we take special care to determine your RMD, stay on top of where you’re at, and communicate if we believe you’ll be short, even though the ultimate responsibility falls on the account holder.

What can I do with my RMD?

Anything that floats your boat once you pay the tax code creators their money. The big question is, what is your current financial goal?

• Create a monthly paycheck

• Throw the entire thing toward knocking out debt

• Fund a grandchild’s education

• Experience that dream trip to the Maldives (My personal dream)

The only restriction is that RMDs cannot be rolled into another tax-advantaged account. Our financial advisors help you determine the best way to utilize your RMD.

What happens to the rest of the money left in the account?

Hopefully, it grows, grows, grows! Why not let the pot expand so it stretches further or allows you the flexibility to take out more? If your RMD withdrawal is at a lower percentage than the account growth on average, you never run out. We design an investment allocation to minimize risk but maintain account growth. And if the assets are in a Roth account (meaning tax-free growth and withdrawals), your heirs have a growing gift as your financial legacy.

Working with The Dala Group

One reason working with a Wealth Management firm like The Dala Group can pay dividends for your future is knowing when and how to take your RMDs. We are adept at determining how to manage your RMD, optimize withdrawal timing, and minimize taxes owed. We often encounter situations where RMDs can cause unexpected outcomes. For example, a surviving spouse could get kicked up into a higher tax bracket and be subject to increased monthly Medicare premiums. That situation illustrates where we address long-term financial planning from the start. We help you ponder today’s goals with an eye toward the future. If you’re looking to have an RMD pro in your corner, contact us today to schedule an introductory call.