What is an RMD?
A Required Minimum Distribution (RMD) is a minimum amount that a retirement plan account owner must withdraw annually starting with the year that he or she reaches a certain age.
Why do I have to take an RMD?
The short answer? The Federal Government wants their pound of flesh. Tax deferred accounts such as IRAs and 401(k)s, provide investors with tax deferred retirement savings. Compound growth can be a very powerful tool in the accumulation of your retirement nest egg. When money is eventually withdrawn from your account, a taxable event is triggered, and taxes are levied on the distribution. While encouraging people to save for their future is in the best interest of the government, allowing the accumulated wealth to go untaxed forever would not be financially feasible for the Government’s budgeting considerations.
When do I need to start taking my RMD?
Let’s make it easy. If you turned 70 ½ in 2019 or before, you should already be taking your RMD. The Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019 signed into law by President Donald Trump on December 20, 2019, among other things, changed the age in which RMDs must start to age 72. Be aware, there are some nuances to this rule that may apply which are beyond our scope here.
What is the penalty for not taking my RMD?
You may be thinking, “Can I just not take my RMD?” Yes, that is an option, but the penalties are severe. The IRS imposes a 50% penalty on the amount that you should have taken but didn’t. This penalty is the highest imposed by the IRS.
How is my RMD calculated?
The calculation is straight forward. Your RMD for the year is calculated as the value of your deferred account(s) at the end of the previous year (December 31st), divided by a life expectancy table amount (either the Uniform Lifetime Distribution (ULD) table or the Joint Life Expectancy (JLE) table, depending on a several factors).
Can I consolidate my RMD from multiple accounts and take it in one lump sum from any of my accounts?
Yes and no. The aggregated amount from all IRAs can be withdrawn from any one account. Beneficial IRAs can also be combined, but only if inherited from the same decedent.
Can we, as a married couple, combined our RMDs and take it from one account?
No, an RMD taken from one spouse’s retirement account does not satisfy the RMD on the other spouse’s account, even if they are the same account type. An IRA owner must distribute the entire amount of his or her account(s) over the life of the owner, or over the life of the owner and a designated beneficiary. There is no provision for a married couple to take both their distributions from only one of their accounts.
What if I don’t need the money the government is telling me I have to take?
Below are several suggestions on what to do with your RMD money after your living needs are met.
1 – Spend it
Treat yourself, spend your money, go on a vacation somewhere, you worked hard and saved your whole life and now is the time to enjoy it.
2 – Reinvest it
After the money has been taxed, you can reinvest the net proceeds into a taxable brokerage account. This account can be set up with the exact same risk and return profile that your deferred account had established. This strategy allows for continued growth of your asset base. Unfortunately, the earnings on the account are taxed on an annual basis. If leaving a legacy is a concern, the portfolio can be adjusted to meet these needs.
3 – Gift it to a loved one
If you have loved ones that you plan to gift money to, you can start now. With this strategy you can see the joy your gifts bring while you are still alive. It is important to note that the IRS imposes annual limits on how much you can gift each year without having to file a gift tax return.
4 – Fund education costs
Higher education costs are escalating rapidly. Contributing to a 529 plan can be a great way to help prepare for these costs. As a grandparent, you are in a unique situation to help fund a grandchild’s education without impacting their eligibility for financial aid. The timing of payments from this type of account is critical if you employ this strategy.
5 – Donate the proceeds directly to a qualified charity
Due to recent changes in the tax code, many charitably inclined people have seen the tax benefit they once received either diminish or become eliminated completely. This is because many taxpayers are taking the standard deduction and not itemizing their deductions (where charitable donations are recognized). By donating your RMD to a recognized charitable organization directly from your deferred account, you not only reduce your income (the RMD is not counted as income on your tax filing), but you also can continue your philanthropy and receive a monetary benefit at the same time. Rather than giving throughout the year, perhaps a lump sum annually may be more appropriate.
6 – Pay Long-Term Care (LTC) Insurance premiums
Nearly 70% of people 65 and older will need long term care at some point during their life cycle. The average cost of a private room at a skilled nursing home or facility can cost well over $100,000 a year and this can quickly drain your retirement savings. To mitigate this risk, insurance providers sell Long-Term Care Insurance (LTC) plans. Premiums, however, can be very costly if the plan is not purchased early enough. Perhaps using your annual RMD to pay these premiums is an option if you haven’t yet established a policy.