If you have a retirement account — an IRA, 401(k), 403(b) or other “qualified” retirement account — and you are, or have reached, the age of 73 this calendar year, it is time to calculate and withdraw your required minimum distribution, or RMD.
It’s actually a very simple process, but failure to calculate the RMD accurately can result in a substantial penalty. Here are a few other things to keep in mind.
—Year-end balance. This year’s RMD is based on the total balance in all your retirement accounts at the end of last year — December 31, 2022. You’ll have to go back to those records as a starting point. And that task should serve as a reminder to total up your retirement account balances early in the new year, from your year-end 2023 statements — to calculate your 2024 RMD.
—Calculating your RMD. You can find RMD calculators at almost every financial services firm’s website. Or use this: www.calculator.net/RMD-calculator. You’ll input the year of your birth and the total value of your retirement accounts, and it will also ask if your spouse is the primary beneficiary. If so, you must include your spouse’s birth year.
The calculator might also ask for your estimate of what you’ll earn each year on your remaining funds after the RMD. That lets them calculate the remaining balance and estimate future withdrawals. (Use a conservative number like 3% for this estimate.)
—Where to withdraw. You can take all the money out of one retirement account — or take a portion out of several accounts — as long as they add up to the total RMD you calculated. Each RMD distribution will generate a 1099 specifically designated as an RMD withdrawal.
—Consider taxes. All the money you take out of a qualified retirement account via your RMD (or any other additional withdrawals) is added to your ordinary income, and taxed at your marginal tax rate. You might want to ask the custodian to withhold at least 20% (or more if you’re in a higher bracket) for taxes, so you don’t get a big tax bill at the end of the year. (Alternatively, you could file a quarterly estimated tax form during the year.)
Working Lunch
—When to take distributions. Since you can calculate the RMD in January, based on year-end account balances, you could ask your custodian to send you 1/12 of the RMD amount every month, after withholding taxes. It would serve as a sort of planned monthly income, spread throughout the year. Or you can wait until December and take it all out at the same time. But don’t get caught in the last- minute crunch at year-end when fund companies are facing a wave of procrastinators!
Planning for RMDs requires some strategic considerations. Timing is one decision. If you think there is going to be a big bull market in the coming year, you might want to wait until near year-end to take your RMD, allowing the money to grow inside your IRA. But if you want the security of regular monthly income, you’d go with a monthly or quarterly RMD check. Remember, the total amount withdrawn isn’t going to change during the year because it is based on last year’s account balance.
The other strategic consideration is how you invest your retirement accounts in anticipation of next year’s withdrawals. The conservative way is to raise cash earlier in the year, and keep it in a money market fund inside your retirement account. That way a wave of year-end selling in the market won’t force you to sell stock or mutual funds at low prices. When you’ve taken this year’s RMD, it’s time to look ahead to the challenge you’ll face next year, and again raise some cash inside your plan.
One other important note: Once you’ve reached age 73, you won’t be able to roll over one retirement plan to another, unless you’ve already taken your RMD from that account.
You worked hard to accumulate your retirement dollars, now plan wisely to take the distributions. And if you’re among the lucky few who don’t need the RMD money for everyday expenses, you can always put it in certificates of deposit or T-bills, to continue earning interest. That’s the Savage Truth.
(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.)
©2023 Terry Savage. Distributed by Tribune Content Agency, LLC.