72 is the New Age for Required Minimum Distributions

As we head into 2022, it's crucial to know the new rules for required minimum distributions. If you're unsure of what RMDs entail, we'll go into greater detail in this article.

To start, let's specify what a required minimum distribution is for those that may not be familiar with the term. An RMD refers to the amount of money a person has to withdraw annually from their tax-deferred retirement account, and RMD's apply to those who are turning 72 this year or older.  (If you have a Beneficiary IRA and the person died prior to 2020, then you have a different set of rules.  See your financial advisor to help with those calculations because they are complex.)

It's essential to take note here that the RMD age is now 72 and not 72 1/2.  The prior rule was 70 ½ and many people are still adding the “1/2” to the new age of 72 “even.”  Let's talk more about clients' common questions regarding RMDs and hopefully help you understand your options better.

Reaching the RMD Date

Especially in the beginning, starting to take your Required Minimum Distribution can feel overwhelming.  We've created a flow chart called “Can I Avoid Taking My RMD After I Reach My Required Beginning Date” in hopes of helping our clients figure out where they stand with their RMD and why. While the flow chart is meant to simplify, depending on your situation, it can actually be pretty complex.  Let’s discuss a few key concepts from the chart in this article. 

Required Minimum Distribution Calculations

The IRS supplies quite a bit of well-explained information regarding RMDs and the amount they expect you to withdraw every year. In general, your RMD calculates by taking the account balance on December 31st by life expectancy. The good news is, we make the calculation for you and will help you to make sure you take out the appropriate amount.  We also follow up with you to make sure you’re covered each year.

Working with Multiple Retirement Accounts

Many people are wondering what they should do if they have more than one retirement account. The easy answer is to add up the RMD (Required Minimum Distribution) in each account and withdraw the total amount from the IRA that makes the most sense.  You can withdraw the required amount from each account, but it’s not required.  As long as you take out the total amount, you’re OK!

Tips for Optimizing your RMDs

There are a few tips you can use to best optimize your RMDs. For example, you can decide when to receive your RMD funds during the year.

Lump-Sum:  If you’re going to take the funds out in a Lump-Sum, then we recommend doing so in the beginning of the year for two reasons, first, there is a slight tax advantage in most years to take the funds out early, second, if anything happens to you at the end of the year and you haven’t taken your distribution, you can put an undue burden on your beneficiary, who may miss the deadline and be subject to penalty.

Monthly Withdrawals:  Many clients like to have monthly withdrawals because they enjoy a regular cash flow.  It’s a great income replacement strategy.   

Charitable Gifts: You can also make a direct donation to the charity of your choice with all or a portion of your RMD, that amount then becomes a tax-free distribution.  You can currently contribute up to $100,000 to your favorite charity or charities. 

First Year RMD:  Finally, remember to try and take your first RMD the year you turn 72.  If you wait until the following year and take it before the April 1st deadline, you’ll have to turn around and take another distribution in the same year before December 31st, making a “double” distribution and potentially a significant increase in income tax compared to spreading it out.  Planning this way can keep you out of a higher tax bracket the following year.

Can I Reinvest My RMD?

Yes, definitely, but not back into an IRA.  Many people say to me, I don’t need the money that I’m required to withdraw, can I contribute it back into an IRA?  You can put the money into a regular investment or savings account, but you can’t put it back into an IRA as a contribution.

If you have plenty of income coming from other sources, you can actually move an investment from inside of your IRA into your regular account.  You don’t have to sell and move cash unless it’s coming from something like an annuity IRA.  This is often a surprise to learn.

The Ever-Evolving World of Required Minimum Distributions

It's helpful to work with a wealth management advisor, primarily regarding retirement savings accounts and the requirements that come with them. Working with a professional who has a complete understanding of your wealth, as well as what you've saved and what you have access to, will make retirement seem less daunting.

Also, if you're still working, it’s a little more complicated as the chart suggests. The rules that surround required minimum distributions are difficult, and it's not uncommon for our clients to ask plenty of questions concerning the topic.

When you work with an advisor that understands your unique situation, you can gain the financial confidence that comes with long-term financial planning.