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RMD Series: The Basics

September 15, 2020

If you have tax-deferred retirement accounts, managing your annual Required Minimum Distribution (RMD) is a critical part of your financial plan.  The first step in managing your RMD is understanding when it needs to be taken and how the IRS requires it to be calculated.

What is an RMD?

A required minimum distribution is a mandatory annual withdrawal you must take from your tax-deferred retirement accounts—Traditional IRAs, employer-sponsored retirement plans, and other tax-deferred retirement savings vehicles—beginning the year you turn 72.

The age requirement changed from 70½ to 72 with the passage of the SECURE Act in December 2019. Retirees turning 70½ prior to December 31, 2019 are subject to the previous RMD regulations.

When must I take RMD?

The first withdrawal is unique in that it must be taken by April 1st of the year after you turn 72.  For every year thereafter, the annual withdrawal must be taken by December 31st.  The RMD may be taken in one annual lump sum or taken in periodic installments throughout the year.

How do you calculate an RMD?

The dollar amount you are required to withdraw will change each year.  Your annual RMD is calculated by dividing the year-end total of all your tax-deferred accounts by the IRS Life Expectancy Figure that corresponds to your marital status, your age, and your spouse’s age.  As you become older and your life expectancy decreases, the amount you are required to withdraw each year will increase.  For any RMD not taken by December 31st or for any shortfall in the amount withdrawn, the IRS charges a 50% penalty, making it critical to your financial plan that the calculation is done correctly.

For example:

John, unmarried, turns 72 years old on February 2, 2021 and has exactly $1,000,000 in an IRA as of 12/31/2020.  He is required to take $39,063 dollars by April 1, 2022 ($1,000,000 divided by the IRS distribution period of 25.6).

John’s account value does not change over the next year and is still $1,000,000 as of 12/31/2021. He is required to take $40,486 by December 31, 2022 ($1,000,000 divided by 24.7). Thus, John will be required to take more each year based on a life expectancy table.

For More Information

For more information about your RMD options, please reach out to a Dean advisor.  For over 50 years, C.H. Dean has been guiding clients through the RMD process and developing personalized strategies that leverage RMDs to help our clients achieve their financial goals.  We are ready to discuss strategies that may be right for you to help you live the life you envision.