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Seven Things to Know About Required Minimum Distributions

David Hicks

Tax-deferred retirement accounts such as 401(k)s and IRAs are subject to Required Minimum Distribution (RMD) rules. These used to kick in the year you turn 70 ½, but the SECURE Act, which became law at the beginning of 2020, changed the regulations. Here’s what you need to know:

  1. If you own a traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), or 457(b), you have to take your first required minimum distribution by April 1 of the year following the year in which you turn 72. In all subsequent years, you must take it by December 31.
  2. If you own multiple pretax accounts, you must determine the required minimum distribution for each account. However, you may withdraw the total amount from just one of your accounts to satisfy the requirement.
  3. You may calculate your required minimum distribution by visiting the IRS website. You can also contact the trustee or record-keeper of your account and request information about the amount of your RMD.
  4. Planning ahead for how you’ll take your RMD is important because it can have a significant impact on your tax bill for the year.If you aren’t mindful, your required minimum distribution could knock you into a higher tax bracket and affect the amount of taxes you’ll pay on Social Security income.
  5. If you’re over 70 ½ and still working, your employer’s 401(k) plan may allow you to defer your RMD until after you retire(or if you shift to a part-time schedule), as long as you are not a 5% owner of the company.
  6. RMDs are not eligible for rollover and they must be processed before other distributions. If you’re thinking about rolling over your 401(k) to an IRA while subject to RMD requirements, you must first take the RMD before your remaining 401(k) balance can be rolled over.
  7. If you fail to take your RMD by the deadline, you will pay a 50% excise tax on the amount you should have withdrawn.  If you don’t take your RMD from your 401(k) plan, you may get a check in the mail anyway. Employer-sponsored retirement plans may force you to take the RMD even if you don’t request one. If an employer fails to distribute a participant’s RMD, the plan may face potential disqualification, which would have negative consequences for all plan participants.

Looking for some guidance on how to best plan your RMD to minimize your tax bill and maximize your savings? We can help. Request a complimentary conversation with a financial advisor today!

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