What are RMDs?
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Hello and welcome to Cornerstone clips. Today we will be discussing required minimum distributions. So, what are required minimum distributions when you save money in certain retirement accounts such as traditional IRA’s or 401K’s, the government allows you to defer paying taxes on that money until you reach retirement age. But once you hit a specific age, the IRS requires you to start taking withdrawals from your retirement accounts.
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There are two kinds of required minimum distributions or RMDS ones that are you. You are required to take from your own accounts and ones that you are required from accounts that you inherit. There are different rules for each. For RMD’s on your own accounts, they are only applicable if you own pretax accounts, not ROTH. If you have traditional IRAS or pretax 401K’s, the IRS requires you to take annual distributions starting at age 73. This age is likely to change in the future, but for now it is age 73.
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Once you are 73, there is an IRS calculation that uses the previous year end balance and a predetermined life expectancy factor to calculate the annual amount. The required amount will change each year. Distributions must be taken by the last business day of the calendar year or a penalty will apply.
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Cornerstone does track the RMD’s for your accounts held with us, but if you have multiple accounts, you need to make sure the total distribution for the calendar year satisfies all required amounts. For example, if you still have a 401K from your previous employer, you have to calculate the RMD on this account as well as the Traditional IRA account held with Cornerstone.
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You have options as far as what to do with your RMD’s. You can send the funds to your bank account to supplement your living expenses or maybe go on a special trip. You can also send the funds to a non-retirement account and the funds stay invested in the market, the IRS. Only cares that you take the distribution out of your IRA so that they can receive the taxes.
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However, there is another option to consider if you do not need the extra income that RMD’s provide, you can make qualified charitable distributions or QCD’s. The IRS allows you to send funds directly from your IRA to a qualified charity of your Choice.
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Normally RMD’s are reported as taxable income. However, by doing a QCD the RMD gets to be treated as non taxable income. This is not a tax deduction, but rather just excluding the distribution from your income for that year. You have flexibility to do some or all of the above options as well. For example, if your RMD is 20,000 this year, you can send 10,000 to your bank and 10,000 to various charities.
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For RMD’s on accounts you inherit, the rules are more complicated and there are recent law changes affecting these accounts and distributions. If you inherited the account prior to 2020. These distributions work identical to the RMD’s on your own account but start to the year after the account was inherited. If you inherited the account after 2020, then the IRS now requires these accounts to be liquidated within 10 years And some require annual distributions during those 10 years. Be sure to start making a plan for your RMD’s and reach out to us with any questions. We are happy to help.
