“Financial Fitness” with Ashlea (Kleitsch) Jones – “What is an RMD?”

One of the only times you hear someone receive a wad of cash and say “I wish I didn’t have to take this” is when they receive their RMD or Required Minimum Distribution. If you are in your early 70s and have a chunk of tax deferred investments, you probably know exactly what I am talking about. For everyone else, let’s address what an RMD is, why it exists, and what your options are at (and before) RMD age.

What is an RMD?

A required minimum distribution or RMD is the minimum annual withdrawal you must take from certain tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, once you reach a specific age. The purpose is to ensure the IRS collects taxes on the funds, which are taxed as ordinary income upon withdrawal.

Why are you forced to receive a distribution?

The reason you are “forced” to execute the withdrawals is because as you saved your earnings, the taxes were deducted in the year you invested and the taxes on the principal and growth were deferred to the future. Now the government wants to collect!

What can I do with the cash?

There are many ways to execute this distribution. The government doesn’t care what you do with the assets, so long as they are distributed from the accounts

• Receive the assets directly (via a recurring payment like a paycheck or in lump sum distributions at the timing of your choosing)
• Journal the assets to a brokerage account to keep them invested
• Donate some or all of the distribution via a qualified charitable distribution to offset the amount of taxes owed. Your local Fire Department Your local Education Foundation The Boys and Girls Club Local food bank(s) Anywhere you feel compelled
  • Your local Fire Department
  • Your local Education Foundation
  • The Boys and Girls Club
  • Local food bank(s)
  • Anywhere you feel compelled

Is there anything you can do to help minimize tax implications?

Here are the current age brackets for the RMD as you turn “of age”:

• For those born in 1951–1959, the RMD age is 73
• For those born in 1960 or later, it’s 75.
• Previously, the RMD age was 70½ for those born before 1949 and 72 for those born between July 1, 1949, and December 31, 1950

Whether you are in current RMD years or still have a long time to worry about them, there is a lot you can do to help gain control of your distribution timing. Your RMD is calculated based on your age, your spouse’s age, and the value of your tax deferred account as of December 31 of the prior year.

Roth conversions are very popular – when you convert tax deferred assets to tax free assets, you pay the taxes now but then have complete tax-free ownership and control for the rest of your life. After 59 ½, you can begin journaling or transferring assets by distributing them from the IRA, if you can absorb the taxes, and keep the assets invested while lowering your RMD implications in the future. You might also just elect to begin a weekly or monthly distribution as an income so it lowers the overall amount of your tax-deferred assets before you turn RMD age. Lots of options are available.

If this information dump makes you feel paralyzed with indecision, you may want to run through a Financial Planning session with a trusted advisor to make sure you are making the best choices for you, your taxes, your income streams, and your legacy! As always, we can help!

Financial Advisor
Prime Capital Financial
Cedar Rapids, Iowa
primefinancialcedarrapids.com
(319) 269-7143