Get ready to give Uncle Sam his cut with RMDs
It’s time to start thinking about RMDs — those required minimum distributions that you must take from your retirement plans every year, once you reach age 72. Of course, those withdrawals can be made at any time of the year, but many people leave it to the last minute, which could be an expensive mistake.
What is an RMD?
Over your working years, you made tax-deductible contributions to your retirement plan — either a 401(k) or403(b) at work, or perhaps an Individual Retirement Account. And the money in those accounts has been growing tax-deferred over the years.
Now the government wants its share of that retirement windfall! You might not want to take any withdrawals, especially if you have other savings to live on. But the rules say that starting at age 72, you must withdraw a specific amount every year. That withdrawal is added to your ordinary income and taxed at your marginal tax rate
The amount of your RMD is based on a formula that is designed to nearly draw down your account over your projected actuarial lifetime, based on the government’s Uniform Lifetime Table.
To find the amount of your RMD, just do a Google search for “RMD Calculator.” Many financial firms have online tools that allow you to input your age and the total balance in all your retirement accounts at the end of last December.
That may be especially painful this year, since most retirement accounts have followed the overall stock and bond markets to significant losses. Yet your 2022 RMD will be calculated on the value at year-end in December 2021. Thus, the percentage that must be withdrawn at your specific age might take a bigger chunk out of your now-smaller portfolio.
You don’t have to do the RMD calculation yourself. Just ask any of your retirement plan custodians to do the work for you. However, you must give them the total value of ALL your retirement accounts at the past year-end to make the correct calculation.
You can take your RMD from any one of your retirement accounts, or a bit from each one of them. As long as the total amount withdrawn adds up to the prescribed RMD, you’ll be fine. There’s a 50% tax penalty of the amount you should have withdrawn if you fail to take your full RMD.
You can take your RMD monthly or at any time during the year. Or you can wait until the end of the year to make your withdrawal. But don’t wait too long, as the IRA custodians get busy with procrastinators at year-end.
Eventually you might decide to consolidate your retirement accounts with one custodian. Be warned that once you’re over age 72, the custodian will require you to take an RMD first, before doing a rollover.
Remember, this withdrawal is taxable as ordinary income. So be sure to instruct your custodian to withhold 20% for taxes — or more, if you’re in a higher tax bracket. Your alternative is to file a quarterly estimated tax return to cover these withdrawals.
Once withdrawn, the money is yours to save or spend. But you must pay the taxes (unless you donate part of your RMD directly to a charity). Taxes are the price you pay for your diligent savings and investment success.
Why think about RMDs now? If the market sells off at year-end, you will have to sell more shares to fund your RMD. You could sell some stocks or funds now, and leave the money in a money market fund until December — easy to access for your RMD, and potentially less painful!
One more reminder: This year, keep your December retirement account statements and do the RMD calculation in January. The number won’t change, except that you’ll be a year older in the online calculator. That way, you can be prepared for the withdrawal that must come in 2023.
Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com. ©2022 Terry Savage. Distributed by Tribune Content Agency, LLC. “Why think about RMDs now? If the market sells off at yearend, you will have to sell more shares to fund your RMD. You could sell some stocks or funds now, and leave the money in a money market fund until December — easy to access for your RMD, and potentially less painful!”