The financial industry is filled with acronyms and specialized jargon. One common acronym you may encounter is RMD. But what does RMD mean, and what do you need to know?
Required Minimum Distributions (RMDs) are the minimum amounts that IRA and retirement plan account owners must withdraw annually, starting in the year they turn 73 (for individuals born between 1951 and 1959).
The rules updated by the SECURE 2.0 Act have increased the RMD starting age for individuals born in 1960 or later to 75.
If an individual is required to begin taking their RMDs in the calendar year 2025, it means they have already turned 73 or will turn 73 by December 31, 2025. To ease the process for IRA and retirement plan account owners with late-in-the-year birthdays, the IRS establishes the Required Beginning Date as April 1 of the calendar year following the year in which you reach the applicable age.
Except for the first year, when the individual can defer to April 1 of the following year, the IRS mandates that RMDs be made annually by December 31. If an individual chooses to defer their first-year distribution, they must take two distributions the following year: one by April 1 for the previous year and another by December 31 for the current year.
RMDs are calculated using the account’s closing value on December 31 of the previous year, divided by the applicable IRS-provided life expectancy factor. The RMD distribution tables are designed to ensure that the account balance is fully liquidated by age 115.
One exception the IRS allows for delaying an RMD is for account owners who have a retirement plan at their current employer. These individuals may defer their RMD until they retire, unless they are a 5% owner of the business sponsoring the plan.
RMDs are considered taxable income and are taxed at regular income tax rates rather than at the possibly lower capital gains tax rates.
Individuals have options when it comes to handling their RMDs. If someone needs the distribution to supplement their living expenses, they can choose to have the net distribution, after tax withholdings, sent to them or directly deposited into their bank account.
For those who do not need the distribution immediately, they can have the net distribution allocated to an after-tax account, allowing for continued potential growth of the account value for future needs.
Charitably inclined individuals can satisfy their RMDs by making a donation to charity through a Qualified Charitable Distribution (QCD). This process involves sending the distribution directly from the custodian to the charity. The account owner cannot receive the RMD and then donate it; it must be processed directly from the custodian.
Understanding the timing, methods, and implications of RMDs can potentially save you thousands of dollars in retirement and help create a more tax-efficient strategy as you navigate your retirement years.
Navigating IRS rules often requires professional guidance. Feel free to contact our office for a copy of our proprietary RMD flowchart report, which illustrates each step of the RMD process.
Michael Wallin, Certified Financial Planner ™. For more information, please see www.panthrex.com or call 615-236-2220.
