You wake up on your 73rd birthday. “Whose body am I in?” you think, “I still feel like I’m in my 20’s”. You sit up, and that familiar ache returns. Alas, it is your body, and today is your birthday. You remember reading something about turning 73 in a money magazine, then Google the article. Required Minimum Distributions from retirement accounts are due this year. “What if I don’t need the income this year?” you wonder. “Ah, but we need the tax” replies the IRS.

A Required Minimum Distribution (RMD) is the minimum annual amount you must withdraw from pre-tax retirement accounts like IRA’s and 401(k)’s. Here’s what you need to know:

• Purpose: RMDs are designed to prevent retirement accounts from staying tax-deferred forever. While contributions during working years received a tax deduction, by age 73 the taxable distributions must begin. The IRS always gets their income tax 😊

• When: You generally must begin taking RMDs beginning in the year you turn 73. If your birthday is July or afterwards, you can delay your first payment until the following year (however, it must be out by April 1). You will still need to satisfy your RMD during your age 74 year. 

• Calculation: The amount you must withdraw each year is calculated based on your Uniform Lifetime Table Life Expectancy Factor divided by your prior year-end account balance. For example, the age 73 factor is 26.5.

So, if your year-end balance was $100,000, you would divide $100,000/26.5= $3,773.58

• Tax Implications: RMDs are taxable income, whether you take the money as a check, bank transfer or move it to a taxable investment account

• There is one way to avoid taxation: if you send the money directly to a Non-Profit 501c(3). This is known as a Qualified Charitable Distribution (QCD). The amount distributed will satisfy your RMD totals, and you will avoid taxation.

• Do All Accounts Have RMD’s?: Roth IRAs generally do not have RMD requirements. Brokerage, trust accounts and non-retirement accounts generally don’t require distributions. Employees (not owners) who are still working at age 73 and older can usually avoid company retirement plan distributions until they retire.

• What if I Inherit an IRA? If you’re the spouse and beneficiary of a deceased IRA owner, you can claim the account as your own and RMD’s will be based on your life expectancy. If you’re a child or sibling of the IRA owner, you will likely need to begin distributions in the year you receive the account. Exceptions apply.

• Penalties: Failing to take your RMD can result in a 30% penalty from the IRS on top of ordinary income tax. Plus, the distribution still needs to occur.

If you’ve got questions about your accounts or required minimum distributions, give us a call at 530-487-1777. We’re happy to help.