Retirement can be an exciting time — it’s finally time to pursue your dreams, spend time with loved ones, or even give your time to the causes and communities you love most. You’ve saved up a nest egg and diversified your retirement portfolio to use when you need it, right?
Not exactly, which may come as a shock to some retirees.
Once you reach age 72, you generally are required to begin taking a portion of your retirement accounts, which is known as required minimum distributions (RMDs). If you turned 70 ½ in 2019 or earlier, you still fall under the old rule of 70 ½ and must continue taking your RMD.
While this legal withdrawal requirement may seem intimidating, there are a few simple questions to ask yourself. RMDs can be an important part of your retirement income strategy, so having an RMD strategy can help.
Here are three questions you should ask yourself when planning your RMD strategy.
What are the rules surrounding RMDs?
As previously stated, the year you turn 72, you are generally required to begin withdrawing from your retirement accounts annually, no matter your income situation.
Some retirees may be familiar with this if they possess a beneficiary IRA, but the rules might differ from your personal account. Failing to take these withdrawals will result in a 50 percent federal tax penalty on the amount that should have been taken in addition to the ordinary income taxation.
Most retirement accounts, including 401(k)s, are subject to this rule, but there are a few exceptions: if you’re currently employed or have a Roth IRA. If you are still employed and part of your company’s 401(k) plan, you may want to delay.
When do I take my first RMD?
Age 72 might seem like a specific time to begin taking your RMD, so let’s clarify this: The year you reach 72, you have until the end of the year to collect your RMD or you could delay taking that payment until that following April, taking out two RMDs in the same year. While taking a “double payment” that first year may seem attractive, you could run the risk of being moved up to a higher tax bracket. Consider your options, but it may prove beneficial to take the first RMD the moment you’re eligible.
What if I don’t need the funds?
Perhaps you have a portion of your assets in savings and don’t need to use funds from RMDs — put it to good use! You’re not required to use the money on yourself if you don’t need it for living expenses. It’s your money — you decide what to do with it.
You could consider donating these funds to a charity or nonprofit organization you deeply care about. If you’d like to potentially grow those assets more, you could even re-invest the funds into the market or purchase another financial product, if you agree to the terms of the product.
Navigating RMDs can be intimidating. Attend one of our courses in your area to discover more!
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