We are encouraged to save and invest in retirement accounts to provide a source of income in our retirement years. These retirement accounts include IRA's, ROTH IRA's, 401k's, 403b's, and 457 plans. These savings vehicles allow us to defer paying tax on the money and what that money may earn until we withdraw the funds at retirement. Saving seems simple enough, but these accounts also carry complex rules and regulations when it comes time to withdraw funds, particularly when we reach certain ages. In addition, when we pass, our beneficiaries are also subject to a complex set of rules when they inherit retirement account money. For example, once we reach the age of 72, except for ROTH IRAs, we must begin taking distributions from our retirement accounts whether we want to or not. These are called 'Required Minimum Distributions,' also known as 'RMDs'. When we pass, and our family members inherit the retirement money, they too are subject to distribution rules.
Many questions surround RMDs; for example, how much does one have to withdraw, and how do you calculate it? What if I have more than one retirement account? Do I have to withdraw from each account, or can I take what is required from just one of the accounts? What happens if I don't withdraw the money I am supposed to? Are there any exceptions to the RMD requirements and/or ways I can avoid paying tax on the distributions? What happens with the money when I die, are my heirs required to take the money out of the account? Are they subject to the same RMD rules as I am?
The topics of RMDs, Required Minimum Distributions, and QCDs, Qualified Charitable Distribution, are not ones that will get most people to stop what they are doing to tune in. Investors may think they have plenty of time, years maybe before they need to worry about RMDs and/or QCDs. Use this month to educate yourself so that when the time does come, there are no surprises.
September's blogs will address these and many other questions in the coming weeks. The rules can be demanding and very complex, and if you do not comply, there can be severe tax penalties. If you will be age 72 this year or already are, give us a call. You have the option to have the RMD/QCD automatically come out of your investment account each year; this can guarantee you do not miss the yearly deadline. Our staff is here to help, so feel free to reach out to us at any time.
David S. Dixon, CFP®