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Retirement Planning
Securing Your Income During Retirement
Like many retirees, you've probably spent years saving for retirement in the hope that you will have enough money to enjoy life for years to come. These days, however, you may be hesitant to spend that nest egg because you are not sure how long you will need it to last. What’s more, market volatility may have eaten away at some of the assets you were counting on during retirement.
There are many retirement strategies out there that retirees have used, only to find out that they just don’t provide enough income on a consistent basis, or they are not guaranteed to last their entire life. What retirees are looking for, now more than ever, is a retirement income that is secure and one they can count on throughout retirement.
As you approach retirement, it’s important to understand the IRS’s required minimum distribution rule. While there are some calculations involved, it’s not as complicated as it might seem, and knowing how it works can really help you manage your retirement income.
All good things must come to an end—that includes the tax deferral on some of your qualified retirement accounts. When people reach a certain age or are about to retire, the Internal Revenue Service requires them to begin receiving payouts from these accounts. These payouts are called required minimum distributions (RMD). Here are a few things you should know about what an RMD is and how it works.
What
The required minimum distribution is the IRS’s way of collecting taxes on the tax-deferred retirement plans you’ve been putting money into all these years, such as a 401(k) or traditional IRA. The following retirement plans are subject to the RMD rule:
Profit-sharing
401(k) and Roth 401(k)
403(b)
457(b)
Traditional IRAs and
IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs
Who
With few exceptions, the RMD rule generally applies to employer-sponsored retirement plan account owners turning 70 ½ or retiring, whichever comes later, and IRA owners turning 70 ½, regardless of when he or she retires.
When
You must take your first RMD in the year in which you turn 70 ½ (or retire, if applicable). This first payment can sometimes be deferred until the following April 1. Regardless, all future RMDs must be taken by every December 31. If you don’t take the distribution, there could be significant penalties.
How
Generally, the RMD is calculated each year by dividing the prior December 31 account balance by the applicable life expectancy factor. It’s best to consult a tax or financial advisor. You can estimate your potential RMD using this calculator provided by FINRA, Financial Industry Regulatory Authority.
No one ever wants to have to pay taxes. But some experts say to look at the RMD as a glass half full rather than half empty. The rate the IRS requires you to withdraw each year increases incrementally through your 90s. As a result, the RMD can be a safe, efficient way to manage your retirement money.
The amount of tax you owe at retirement depends not only on your income, but also on the type of your retirement plan and the timing of your withdrawals; you’ll want to consider retirement strategies that provide tax deferred growth and tax efficiency.
With qualified retirement plans that provide tax deferred accumulation, such as 401(k)s and Traditional IRAs, the money you contribute to the plan is pre-tax, meaning it is not be taxed until you make a withdrawal, often years later. In addition, any growth or gain is also tax-deferred.
Distributions (i.e. mandatory withdrawals) from such qualified plan will, in most cases, begin by April 1st of the year after your turn 70½. The money you receive from distributions is always considered regular (or in IRS terms “ordinary”) income and is taxed at a standard rate. Should you wish to withdraw cash from your retirement plan early (before age 59½), you may be subjected to an additional 10% tax on the amount.
