Demystifying RMDs: Your FAQ Guide

Demystifying RMDs: Your FAQ Guide

May 10, 2024

One crucial financial consideration for accumulating wealth as we approach retirement age is Required Minimum Distributions (RMDs). These mandatory withdrawals apply to individuals with certain retirement accounts once they reach a specified age. Here's what you need to know.

On our weekly Financial Strategies podcast and radio show, we often have callers ask about RMDs. And we get it! The rules of RMDs can be complex, leaving many people questioning how they work and what they mean for retirement planning. If you're ready to navigate RMDs effectively, join us as we address frequently asked questions about this important topic.

FAQ #1: What are RMDs & When Do I Need to Take Them?

Required Minimum Distributions (RMDs) are mandatory withdrawals from certain tax-advantaged retirement accounts that owners must make at retirement age. 

The IRS mandates this age threshold to help ensure retirees begin drawing down their retirement savings and paying taxes on deferred income. 

As of 2023, the age for starting RMDs changed to age 73. The first RMD must be taken by April 1st of the year after you turn 72 (or age 73 if you reach 72 in 2023 or later). Each year after that, RMDs must be withdrawn by December 31st. Understanding the timing and requirements for RMDs is crucial for retirement planning. As always, it is important to consult a financial advisor to ensure compliance with RMD rules.

FAQ #2. How is the RMD Amount Calculated?

The RMD amount is determined by dividing your retirement account balance as of December 31st of the previous year by your life expectancy factor. The IRS uses a specific formula to calculate your RMD, considering your account balance and factors related to life expectancy. To estimate your specific RMD amount, refer to the IRS's Uniform Lifetime Table. It's worth noting that the IRS has additional tables for account holders and beneficiaries whose spouses are considerably younger.

Each account's RMD must be calculated separately, but you can combine the total RMD amount and withdraw it from any of your traditional IRAs to meet the requirement. This flexibility allows you to choose the most advantageous approach for your withdrawals. If you need clarification on your RMD, use our free online RMD Calculator for personalized guidance.

FAQ #3. What Happens If I Don’t Take My RMD?

Suppose you fail to withdraw your Required Minimum Distribution (RMD) by the December 31st deadline. In that case, the IRS imposes a significant penalty—an excise tax of 25% on the amount that should have been withdrawn; possibly 10% if the RMD is timely corrected within two years.

If you miss taking an RMD, you must complete IRS Form 5329. Specifically, Part IX of this form addresses the additional tax on excess contributions due to missed RMDs. It's essential to rectify missed RMDs promptly to mitigate penalties and fulfill tax obligations. Additionally, consulting with a financial advisor can guide you on corrective actions if you miss your RMD deadline.

FAQ #4. Which Accounts Require Distributions?

Required Minimum Distributions (RMDs) primarily apply to traditional retirement accounts and employer-sponsored retirement plans, including:

  • SEP, SIMPLE, and traditional IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit-sharing plans
  • Other defined-contribution plans, such as employee stock purchasing

It's important to note that Roth IRAs do not require RMDs during the account owner's lifetime, as they are funded with after-tax dollars. However, beneficiaries inheriting Roth IRAs may have RMD obligations based on IRS rules and guidelines. Understanding which accounts require RMD distributions is essential for retirement planning and providing compliance with IRS regulations. If you have questions about RMDs related to your retirement accounts, consult a financial advisor for guidance.

FAQ #5. Can I Take RMDs From One Account to Satisfy Another?

While RMDs must be calculated separately for each IRA account, the total required amount can be withdrawn from one or more IRA accounts of your choosing. It's important to note that RMDs cannot be directly rolled over into a Roth IRA. However, any withdrawn RMD amount can be used for living expenses. If eligible based on income requirements, you can contribute a portion of your income to a Roth IRA separately.

For employer-sponsored 401(k)s plans, RMDs must be taken separately from each specific plan. This means you cannot combine RMDs from different employer-sponsored plans to satisfy the requirement from a single source.

FAQ #5. Can I Withdraw More Than the RMD Amount?

You can withdraw more than the Required Minimum Distribution (RMD) amount from your retirement account without penalties. However, it's important to consider that withdrawing additional funds beyond the RMD can increase your taxable income for the year.

Before making any additional withdrawals, it's advisable to consult with a financial advisor to understand the tax implications fully. They can provide personalized guidance based on your financial situation and help you make informed decisions regarding your retirement withdrawals. Remember that strategic planning can help optimize your retirement income while minimizing unnecessary tax liabilities.

Working With a Fiduciary Financial Advisor 

When it comes to preparing for a worry-free retirement, it's crucial to understand how RMDs work. One part of that is staying on top of the ever-evolving landscape of retirement laws and legislation updates. Working with a trusted financial advisor can be a game-changer in effectively managing—and understanding—your RMDs. They can help you fulfill your legal obligations and provide personalized guidance to optimize your financial situation within the bounds of IRS regulations. 

At Agemy Financial Strategies, we are here to offer in-depth insights into your specific RMD responsibilities and explore tax-efficient strategies for RMD management. We work with you to assess your retirement income needs and craft a tailored plan aligned with your unique financial goals. Furthermore, as a fiduciary firm, we always act in your best financial interest, not our own. Please refer to our service offerings page for a comprehensive list of our services.

Final Thoughts

Navigating Required Minimum Distributions (RMDs) can be complex, especially for retirees with substantial retirement account balances. Remember, RMDs are a tool that can help you access and enjoy the savings you've diligently built over your working years. At Agemy Financial Strategies, our team is here to provide personalized guidance and support tailored to your financial needs and goals. Let us help ensure your tax obligations are appropriately managed throughout your retirement. 

If you want to learn more about navigating RMDs and planning for a secure retirement, contact us here today.