Your retirement strategy likely includes different investment vehicles, including an IRA, 401(k), pension plan, or some type of hybrid combination, that you plan to rely on once you retire. However, what you may not have realized is the IRS requires you to annually withdraw a minimum amount from your retirement accounts once you turn age 70 1/2. This required withdraw is known as Required Minimum Distributions (RMD), and how much you are required to withdraw is an important factor in your retirement strategy.
Which Plans are Affected
Not every retirement plan requires you make these minimum withdraws beginning at age 70 1/2. In fact, a Roth IRA plan does not require withdrawals at any time, until after the death of the owner. However, almost all other investment plans to require an RMD.
Required Minimum Distributions are required for the following plans:
- Traditional IRA
- SIMPLE IRA
- SEP IRA
- Profit-sharing plans
- 401(k) plans
- 403(b) plans
- 457(b) plans
RMDs must take place starting with in the year you turn 70 1/2, otherwise you run the risk of paying penalties for failing to take the RMD. You are not required to take any more out than what is required by your RMD, but you do have to take the minimum amount starting at age 70 1/2. You can calculate your RMD with this calculator from the Financial Industry Regulatory Agency (FINRA).
What This Means for Your Retirement Strategy
One of the biggest ways the RMD may affect you in retirement is with unexpected taxes. Depending on your tax bracket and how much you are required to withdraw, you may face a more substantial tax than you had anticipated. While it’s important to note that taxes are only based on distributions from a traditional IRA or 401(k), if you had not anticipated your RMD, you may find yourself scrambling at tax time.
Another way this may affect your retirement strategy is your tax bracket. If you include pension income, Social Security, and your RMD, you may quickly find yourself pushed into a higher tax bracket. This could affect your Social Security pay outs, not to mention health care premiums, particularly if you’re on an Affordable Care Act plan. You may consider converting some of your RMD-affected accounts to a Roth IRA account but discuss with your financial planner or accountant first.
Unfortunately, some retirement plan account owners pass away before they reach 70 1/2, leaving their accounts to beneficiaries. If a retirement plan account owner dies before the RMDs have begun, other rules apply to the beneficiary. In general, the entire amount in the retirement account must be distributed to the beneficiary either within 5 years of the owner’s death or over the life of the beneficiary starting no later than one year following the owner’s death.
In this case, RMD rules apply to Roth 401(k) accounts, but only after the owner has died. For more answers to RMD questions, visit the IRS’ Frequently Asked Questions page, where you can learn more about RMDs and how they affect spouses and/or beneficiaries.
Your Required Minimum Distribution can be a terrific supplement to your retirement strategy as long as you have planned ahead for it. In the years you spent saving for your retirement, you may have neglected to estimate your RMD. Instead of being surprised at age 70 1/2, take time before to estimate your RMD and make necessary arrangements to either withdraw the estimated amount, or convert to reduce your tax burden.
Do you need to re-evaluate your retirement plans? Contact us at Parrish Capital and we will help you create the plan that meets your specific needs.