You may spend many decades contributing to your IRA and 401(k), but eventually you will likely need to take the money out – in fact, you must take the money out or face penalties.
Here are some of the basics:
- What are they called? Mandatory withdrawals are technically called required minimum distributions or RMDs.
- When must I take RMDs? You must start taking them when you’re 73 or, if you were born in 1960 or later, 75. After you take your first RMD, you must take subsequent ones by Dec. 31 of each year.
- What are the penalties for not taking RMDs? For every dollar not withdrawn, the IRS will charge a 25-percent penalty, but this can drop to 10 percent if you subsequently withdraw the correct amount within two years.
- Which accounts have RMDs? RMDs apply to traditional IRAs, as well as SIMPLE and SEP IRAs. RMDs don’t apply to Roth IRAs. RMDs also apply to traditional 401(k)s but not Roth 401(k)s.
- Can I withdraw more than the RMD for any given year? Yes, you are free to take out as much as you want. However, if you take out more than the RMD for one year, you can’t apply the excess to the RMD for the next year.
- How are RMDs calculated? Typically, your RMDs are determined by dividing your account balance from the prior Dec. 31 by a life expectancy factor published by the IRS.
- If I have multiple accounts, do I have to take an RMD from each one? If you are taking RMDs from a traditional IRA, you must calculate each RMD individually, but you can take the total amount from one or more IRAs. If you’re taking RMDs from a 401(k) or similar plan, you must take the RMD from each of your accounts.
- How are RMDs taxed? You are typically taxed at your income tax rate on the amount of the withdrawn RMD. You may be able to avoid taxes in a particular year if you transfer your RMDs to a qualified charity.
- If I inherit an IRA or 401(k), am I subject to RMDs? Yes. When you take RMDs from an inherited account, you generally must withdraw all the funds within 10 years, as opposed to over your lifetime, which is the RMD window that applies to your own accounts. The rules are somewhat different if you inherit an IRA or 401(k) from your spouse. In any case, though, you’ll want to consult with your tax advisor about how to take RMDs from an inherited account.
If you’re already subject to RMDs, be sure you’ve taken them before the year ends. And if you haven’t yet started taking RMDs, learn as much as you can about them – because the more you know, the more likely you’ll make the right moves at the right time.
Jacob Anderson / Financial Advisor / 28200 Hwy 189 Suite 03-160, Lake Arrowhead, CA 92352 / (909) 337-8188. This content was provided by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones, Member SIPC
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