Required Minimum Distributions

When you reach a certain age, you must start taking withdrawals from your retirement accounts. These withdrawals are required to ensure that tax-deferred savings are eventually taxed.

RMDs don’t apply to every investment account, you have to take RMDs if you have any of the following types of retirement accounts:

• Traditional IRA

• SEP IRA

• SIMPLE IRA

• 401(k)

• 403(b)

• 457(b)

• Profit-sharing plan

RMDs do NOT apply to Roth IRAs while the owner of the account is living, but RMD rules do apply to beneficiaries of Roth IRAs.

So if you have any of those accounts, you have to take RMDs. But how are you supposed to know how much money you should withdraw to satisfy your RMDs each year?

It’s a little bit complicated, your RMD for the current year is calculated based on your account balance as of December 31st the previous year. That balance is divided by a figure called a ‘life expectancy factor’ that is determined by IRS publications. The life expectancy factor is determined by your age and your spouse’s age and changes from year to year.

In case this is overwhelming to you, I can reassure you that West Invest can help you calculate your RMDs!

Now let’s talk about when you need to take your RMDs. The quick answer is, every year by December 31st. There is an exception to this rule for your first RMD.

When you reach RMD age, you have until April 1st of the following year to take your first RMD. Your second RMD would be taken that same year, by December 31st. You can take your RMDs at any point during the year, or even in installments throughout the year.

Regarding tax implications, the owner of the account is taxed at their income tax rate on the amount of the RMD.

If you don’t take your RMD on time, the amount of the RMD that was not withdrawn can be subject to a 25% excise tax.

If the owner of the account would like to avoid being taxed on their RMD as income, there are options such as Qualified Charitable Distributions, but that’s getting beyond the basics of RMDs and the scope of these videos.