Required Minimum Distributions – Are You Confused?

There have been several changes in the rules for taking Required Minimum Distributions (RMDs) over recent years. This blog focuses on RMDs for your own retirement accounts only. This article does NOT address Inherited Retirement Accounts.

When Must I Start Taking my RMD?

If you have any retirement account(s) subject to the RMD rules, below are the dates when you must start your RMD. If you were born:

· Before July 1, 1949: your RMD start date age = 70..

· July 1, 1949 through December 31, 1950: RMD age = 72

· January 1, 1951 through December 31, 1959: RMD age = 73

· January 1, 1960 or later: RMD age = 75

If you continue to work past age 73, and do not own more than 5% of the business you work for, most plans allow you to postpone RMDs from your current employer's plan until no later than April 1 of the year after you finally stop working. But if you have a 401(k) from a prior employer, you may still be subject to the RMD requirement. And you must take RMDs from any IRAs that you own regardless of employment status.

My RMD is different every year – Why?

Yearly RMDs are calculated using a formula based on the IRS Uniform Lifetime Tables. There is one table for single life expectancy and a different table for joint life and survivor expectancy.

Your distribution period gets shorter every year based on your age - because the distribution periods are based on actuarial calculations of projected life expectancies.

For example, if you are single and take your first RMD in 2024 at age 73, your distribution period is 26.5 years. When you turn 74, it is 25.5 years. Since no one knows how long they will live, the distribution period is designed to gradually increase the percentage of RMDs from your retirement accounts over time - without prematurely draining your nest egg should you live longer than average.

Your RMD amount is also determined by the value of your retirement account at the end of the previous year. If you are single with a $500,000 IRA as of December 31, 2023 - and must take your first RMD at age 73 in 2024 - your 2024 RMD = $18,868 ($500,000 divided by 26.5). Your RMD amount will be different next year - due to a different year end IRA balance (12/31/2024) and different distribution factor (25.5 in 2025).

Calculating annual RMDs is relatively simple. But it can be complicated to figure out which accounts you should take them from.

· If you have a 401(k) or 403(b) plan account AND are no longer actively participating in the plan (due to retirement or a new employer), most plan providers will calculate your annual

RMD. But it is your responsibility to take the RMD withdrawals from your accounts before 12/31 each year.

· Other retirement accounts offer more flexibility and options. If you have several traditional or rollover IRAs, first calculate the RMD for each individual account (most IRA custodians provide this information for you). Then decide how much to withdraw from each account.

o You can take separate RMDs from each IRA;

o You can take the total combined RMD from one IRA;

o Or you can withdraw different amounts from several IRAs that add up to the total RMD amount due when combined.

To simplify your finances, you may want to consolidate all of your IRA and 401(k) accounts into a single rollover IRA with one custodian that calculates your RMDs.

Do I Have Other Options If I Don’t Need the RMD Cash?

If you are age 73, you may have several more decades to live. Consider the following so your money works for you over time:

· Invest the cash in a taxable account. For safe growth, invest in a certificate of deposit or a US Treasury bond to minimize risk and prevent your money from losing value to inflation. To address future years of spending, inflation, and medical bills due to longevity, invest a portion in low-volatility, low-cost equity ETFs or mutual funds.

· Donate some or all of the RMD amount as qualified charitable distributions (QCDs) to eligible nonprofit organizations (501c3). QCDs can lower or eliminate your taxable RMD amount, up to an aggregated maximum amount per year withdrawn from one or more IRAs (maximum = $105,000 in 2024). This amount is adjusted for inflation each year.

· Use the RMD to pay taxes on Roth conversions. Roth IRAs are not subject to RMDs during your lifetime. Doing Roth conversions can reduce the amount of your RMDs from traditional retirement accounts in future years. The Roth IRA must be open at least five years before tax free withdrawals are allowed.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.