If you are one of the fortunate ones who has stashed away pre-tax savings in an Individual Retirement Account (IRA) over the years, the IRS will be taking note of your 70th birthday. That’s when the government wants you to start paying taxes on the money you have accumulated. (IRAs are tax-deferred, not tax-free.)
When you turn 70 ½, you must begin withdrawing a portion of your retirement savings each year and pay taxes at your current tax rate on the amount withdrawn. (Roth IRAs don’t have RMDs; you paid taxes on that money going in.)
Even if you would rather not tap your retirement savings – even if you are still working and not retired – 70 ½, is the government’s deadline for most traditional IRA holders. In fact, they put you on a strict payment plan.
Here are 6 things to know as you plan an RMD strategy:
- The process is complex at first and a mistake can cost you dearly. If you underestimate the amount you are required to withdraw or forget to take it, the penalty is a 50% tax on the amount not taken.
- Use an accountant or advisor to help you set up the RMD. They will help you determine the exact amount you need to pay each year based on government guidelines.
- You can decide to withdraw the funds whenever you like during the year – monthly, quarterly, annually, or sporadically – as long as you do so no later than Dec. 31.
- However, your first year is treated differently. For that year – and that year only – you have until April 1 of the following year to make your withdrawal. You will want to understand the tax considerations of each option.
- If a non-spouse inherits an IRA, not only is it subject to RMD rules, but the rules take effect as soon as the account is transferred to the new owner, no matter what their age at the time.
- Finally, consider how you will accumulate the money to withdraw. Can you use dividends and interest and leave your principal invested? Or will you stay fully invested and sell holdings when you need to?
These are just a few of the considerations investors need to think about with respect to paying deferred taxes on their retirement funds. If I can assist you in planning your required minimum distribution strategy, please contact me.