RMD – What Is This? Part Two

In a previous article, I talked a little about RMD and how with smart tax planning one can save maybe thousands of dollars in taxes.

Let’s review what is a required minimum distribution (RMD). It is the amount of money that must be withdrawn annually from certain employer sponsored retirement plans like 401(k)s and certain IRAs such as a traditional IRA. RMDs must be taken by April after you turn 73 years old. One must calculate and withdraw the correct RMD every year after that or face a penalty from the IRS. RMDs do not apply to Roth accounts until after the account owner dies.

I could list the rules for how to calculate your RMD, but it would take a lot of words and it would be confusing to most of us. Talk with your attorney, accountant or tax professional for assistance.

What is the penalty if you do not take the RMD or the correct RMD amount? A lot of money. The penalty assessed by the IRS on the amount not withdrawn will be subject to a 25% tax. Before the law was changed in 2022, this was a 50% tax. Regardless, that is a lot of money that you lose. There are worksheets that the IRS publishes to help you calculate how much you must take out each year. If you have multiple IRAs or retirement accounts, make sure you take out enough money to satisfy the requirement.

Make sure your accounts have named beneficiaries. There are different tax rates on those accounts that have no beneficiaries vs. those accounts that have beneficiaries. Remember, no matter what, the IRS will get taxes on the full amount at some time in the future. Do what you can now to reduce the tax burden. With careful planning and depending on your financial situation, I have seen money withdrawn that was made tax free.

The rules are complicated and there are different rules for inherited IRAs by spouses and non-spouses. It is our responsibility to pay the tax, but it is also our responsibility to learn the rules, the exceptions and pay as little as possible.

It is always best to discuss these issues with the professionals.

Questions, comments or ideas about future articles contact me at [email protected].

Atty. John J. Urban | National Director and Vice-Chairman of the Board