Navigating RMDs

Required minimum distributions, also known as RMDs, are a very important part of the financial planning process. Many people who save for retirement do so using deferred retirement accounts, and once you reach a certain age, there are requirements for withdrawing from these accounts. A big reason for this is so the government can tax these distributions as ordinary income. 

These required minimum distributions apply to anyone who is 72 years old or will turn 72 in the current year. In 2020, as part of the CARES Act, RMDs were not required for any investors so as we resume these distributions this year it is important to remember how your RMD is calculated, when it must be taken and that there are several ways to take these distributions. Harold talks about multiple changes that the SECURE Act made for RMDs in his post Breaking News - SECURE Act Approved. For many, the SECURE Act changed how RMDs will be taken, especially those with beneficiary IRAs.

First, we will discuss how your RMD is calculated and when you must take your RMD. Your RMD is calculated by dividing your prior year-end account balance by a life expectancy factor. This factor is based off of your age and decreases over time so your RMD will vary from year to year. The RMD can be taken at any time during the year before December 31st, it can even be taken in multiple disbursements spread throughout the year.

Next I will mention the different ways that you can withdraw the funds from your accounts. The first way that probably comes to mind is to take a cash distribution transferred to your bank account to use for living expenses or any other expenses that might come up during the year. This is considered income, so you can use it as needed.  The second way is to transfer cash or securities to a taxable investment account which will allow your investments to continue to growth. Another way to take the RMD is to make Qualified Charitable Distributions, many organizations accept donations that can be made directly from your tax deferred investment accounts. Sandra and Harold go more in depth on QCDs in their blog Qualified Charitable Donation from your Required Minimum Distribution.

These are just three ways that RMDs can be taken, and no one way is right for everyone. There are many factors that can impact the right decision for you and the solution can be a combination of these options or just one.  It is always recommended to work with a financial professional to determine your RMD and the best way to take it.