Tax-advantaged retirement accounts like traditional 401(k)s and IRAs offer many advantages, but some of these don’t last forever. The government eventually reaps the reward of years of tax-free compounded interest by forcing you to withdraw funds from your own retirement accounts and inherited accounts. So if you have a retirement account, be prepared for your RMDs once you reach 70 ½ or inherit an account. If you fail to take a Required Minimum Distribution (RMD) on time, you can incur a 50% penalty on the amount you were supposed to withdraw. The same goes for inherited retirement accounts. December 31st is approaching fast! So as a reminder, don’t forget to take RMDs.
First, keep in mind that you need to leave enough time for us or your financial institution to process an RMD request for your or an inherited retirement account. Since many people have end of year requests, it’s a busy time for institutions. Some might even have an earlier deadline for requests due to high volume. When it comes to the 50% penalty for failing to take an RMD on time, it’s better to be safe than sorry.
After your first RMD from your own accounts, which is due by April 15th, all RMDs are due by December 31st. For many retirees who have successfully saved for retirement, Required Minimum Distributions could potentially cause them to withdraw more than they would like. If this is the case, a retiree might be tempted to wait until April 15th of the year they turn 70 ½ to take their first RMD. However, this could mean they would have to take another RMD by December 31st of that same year. Taking two RMDs in one year could increase their tax burden more than if they spread out their first and second RMDs over two years. Knowing how withdrawals can affect your tax burden is one of 4 things to understand about taxes in retirement.
Keep in mind that you could need to take RMDs from an inherited retirement account, even if you’re not 70 ½ yet. Under some circumstances, you must empty an inherited IRA account within five years of the original owner’s death. However, there is rule that allows beneficiaries to stretch out RMDs over their own lifetimes if the original owner did not reach age 70 ½. If the owner was at least 70 ½, a beneficiary can choose to base RMDs on either their or the original owner’s life expectancy, with the aim of minimizing RMDs.
At Juniper Wealth Management, we can help you minimize your tax burden by planning for RMDs before you start taking them. If you have a substantial amount of your nest egg in a traditional 401(k) or IRA, we can help you create a long term plan based on your specific retirement goals. If you would like to meet with us to find out more, you can sign up for a complimentary financial review.