Most people have a basic knowledge of Required Minimum Distributions (RMDs) but few understand how they pertain to IRAs and 401ks, as well as the intricate timing details that are essential to preparing to withdrawal for tax payments. For a better understanding of the best times to withdrawal as well as avoiding penalties, join John and Ron as they discuss a letter Ron recently received shortly after a big birthday:
The Bass Lines:
[0:45] – RMDs for 401(k)s:
- At age 70½, you have to start taking out a minimum amount from your tax-deferred accounts for tax revenue to be collected.
- As long as you’re still working and contributing to your 401(k), you don’t have to withdrawal from that 401(k) at your current job.
- However, as soon as you retire, you have to take a withdrawal from that 401(k) for the year.
[2:45] – RMDs for IRAs
- IRAs have nothing to do with whether or not you’re still working. If you’re 70½, you’ll have to take money from those tax-deferred accounts.
- If you leave a job with money in a 401(k) without rolling it over to an IRA, you will still have to take the required minimum out.
- The withdrawal amount for an IRA is based on your IRA balance, not the total of your IRA and 401(k) balance. You also must pay taxes on the growth over the life of the account.
[4:35] – Here’s an example:
- The first year, approximately 3.6% of your balance has to be taken out. If you have a $100,000 IRA, you’ll have to withdrawal $3,600 in the first year. That percentage will increase every year, but your balance should be decreasing since you’re taking money out. The amount of account growth will determine how much you’ll have to take out each year.
[5:34] – When do you have to make a withdrawal?
- You can take a withdrawal during the course of the year before you turn 70½. As soon as you’re 70½, withdrawal is required unless you put off the first-year withdrawal. For your first withdrawal, you can wait until April 15th of the following year to take the money out. However, if you put off the first-year withdrawal, you have to take two the following year. This deferment only applies to the first withdrawal. The deadline would be December 31st in all future years.
[7:00] – In what scenarios would I carry it over?
- If you are going to retire at the end of this year, you would want to put the withdrawal off until the next year since your income will be lower. Two payments will come out the next year at a lower income level that will be taxed less.
[7:58] – Avoid a loss in penalties!
- If you don’t make a withdrawal and pay taxes, you’ll get a 50% penalty on the money you didn’t withdrawal. In our example, the $100,000 account withdrawal would be $3,600 in a 22% tax bracket, resulting in $792.00 withdrawn and paid in taxes. If you don’t withdrawal and pay taxes, you’ll then owe $1800.00 with the 50% penalty.
[9:04] – Consider your individual circumstances and the health of the market when considering what time of year to take your required minimum deduction.