As you near your retirement, you may be aware that you’ll need to start taking RMDs, or Required Minimum Distributions, shortly after your 70th birthday. But you might not know which is the best of your accounts to pull from, or whether or not you’re allowed to pull from just one in the first place.
After decades of hard work, you may be sitting on quite a heap of saved assets thanks to the magic of compound interest — and your smart financial planning, of course. But when it comes time to start pulling money from your retirement accounts, the way you go about it matters.
When done properly, taking RMDs offers retirees a unique opportunity to maximize their investments. You already did the hard work of saving the money — you may as well get to enjoy as much of it as possible!
On the other hand, failing to understand the rules surrounding RMDs can lead to hefty penalties and fines that chip away at your well-deserved retirement fund.
So in this post, we’ll explain the basics of RMDs across a variety of common retirement plans… and offer some simple advice to help you keep as much of your nest egg as possible.
Required Minimum Distributions: The Basics
Required Minimum Distributions are just what they sound like: the required minimum amount you must withdraw from your retirement accounts each year once you reach the age of 70.5. You can certainly withdraw more than the required minimum if you wish… but with few exceptions, these withdrawals will be included in your taxable income.
The IRS provides worksheets to help you calculate your required minimum distributions. Generally, you’ll need to take the RMD by April 1st of the year following your 70th birthday. However, in the case of employer-sponsored plans like 401(k)s, you may need to begin taking RMDs when you retire, even if you do so before the age of 70.
Having Multiple Retirement Accounts Affects Your RMDs
That all may sound fairly simple… and it would be, if we still lived in a world where most people took one job after college and kept it forever. Today’s retirees often have several different retirement accounts, which can complicate the calculation considerably.
For retirees who fit this description, it might be tempting to calculate your total required minimum distribution and begin drawing that amount from the account with the lowest interest rate. But unfortunately, per IRS rules, RMDs from each account must be calculated separately — and they can’t always be lumped together, or “aggregated,” and drawn from a single source.
In short, RMDs calculated from one type of account can’t be drawn from another. For example, if you have both a 401(k) and an IRA, you can’t use either one to fulfill minimum distribution requirements for the other.
However, if you have multiple accounts of the same type, you may be able to aggregate them and draw your RMDs from only one — which can help you maximize your total retirement returns and preserve high interest earnings.
RMD Rules for Common Retirement Plans
Here are the basic RMD rules for the most common types of retirement accounts.
Good news, self-starter: IRAs can be aggregated, including SEP and SIMPLE IRAs. Though the RMDs must still be calculated separately, you can draw the total from only one of your IRA accounts without incurring any IRS penalties.
(Psst: Roth IRAs don’t have any required minimum distributions during the owner’s lifetime!)
Like IRAs, 403(b) contracts can also be aggregated, given the contract owner calculates his or her RMDs separately before pulling from only one account.
401(k) and Qualified Plans
Unfortunately, employer-sponsored retirement accounts like 401(k)s usually cannot be aggregated, and RMDs must be taken from each account separately. However, you may be able to avoid taking RMDs from an employer-sponsored account, even at the age of 70.5, if you remain employed by the company.
What About Inherited Accounts?
If you inherit a retirement account from a deceased family member, you are still required to withdraw required minimum distributions, starting on the year of the owner’s death. The first year, you’ll use the same calculation the owner would have, but the RMD will depend on the beneficiary’s relationship to the owner thereafter.
Why the Way You’re Taking RMDs Matters
The very first reason it’s important to know what you’re doing when taking RMDs? If you mess up and miss one, there’s a pretty hefty penalty: 50% of the undrawn amount, to be exact.
But taking RMDs also offers retirees a potential tax benefit and investment planning opportunity. That is, if you take the time to learn which of your accounts can be aggregated and draw from only one, you can preserve the earning potential of, and maximize your eventual returns on, any high-interest-rate accounts you may hold. You might also look into taking your RMDs as charitable distributions, which can offer a substantial savings in taxes.
Although it seems like it should be simple, we know how tricky retirement planning can be — and if you have more questions about RMDs or your specific calculations, we’re happy to help. After all, this is supposed to be the fun part: reaping the benefits of all those years of work and sacrifice.
Contact us today to keep as much of your hard-won retirement money as possible in your pocket!