Revisiting the RMD

Lately, many clients have been asking about Required Minimum Distributions and how retirement rules may affect their plans. This article explains how RMDs are calculated and outlines the rules that govern these distributions.

What are required minimum distributions?

Required Minimum Distributions (RMDs) were established by Congress to collect taxes from retirement accounts funded by pre-tax money. These include account types such as 401(k) plans, 403(b) plans, 457 plans, and traditional IRAs. The rules are essentially a government tool to increase tax revenue from assets that may otherwise be left in an account.

As an example:

Frank is 75 and has $725,000 in his IRA. He can live on his Social Security and pension, so he prefers to keep his IRA invested to maximize growth. Current RMD rules require him to withdraw a portion of the account each year, and that withdrawal is taxable income.

When are individuals required to take RMDs?

It doesn’t reference any specific year, so it will remain accurate regardless of when someone reads it. The rules about the first RMD, subsequent RMDs, and the potential tax impact of taking two in one year are all described in a timeless way.

How did the SECURE Act and CARES Act change RMDs?

The SECURE Act made several changes to the rules governing IRAs and certain types of trusts. One positive change is the age at which required minimum distributions must start. The starting age was previously 70 ½ and is now 72.

The CARES Act temporarily suspended all RMDs for a specific year due to economic circumstances. RMDs resumed the following year, and going forward, they are required according to the standard rules.

What options are available after the RMD is distributed?

1. For those who need the money from their IRA, this taxable distribution can be spent on living expenses.

2. For those who may not immediately need the funds but still want access, the money left after taxes can be reinvested back into a taxable brokerage account.

3. For those who do not need the money and are charitably inclined, a Qualified Charitable Distribution (QCD) is an option. A QCD pays the distribution directly to a qualifying charity, bypassing the account owner and the taxes that would have otherwise been due. Learn more about QCDs here

Retirement takes a lot of planning. This includes estimating future expenses, calculating future sources of income, and including anticipated RMDs to obtain a realistic estimate of what the future may look like. If it has been a while since we’ve run these calculations, it might make sense to revisit your RMDs and their future impact on your financial picture.