Understanding RMDs for IRAs
If understanding the intricacies of Individual Retirement Plans (IRAs) has left you scratching your head, you’re not alone. According to a 2019 study from the LIMRA Secure Retirement Institute, only 34% of Americans believe they are knowledgeable about IRAs. Lacking an understanding of IRA processes, like required minimum distributions (RMD), can lead to preventable tax penalties or even keep individuals from utilizing IRAs as a retirement resource. When it comes to understanding IRAs, this comprehensive look into RMDs for IRAs can give you the knowledge and confidence to invest in your future.
What is a Required Minimum Distribution?
A required minimum distribution is the minimum amount that needs to be withdrawn from the IRA plan annually to satisfy IRS guidelines. RMDs cannot be deposited into another retirement account. Instead, those funds are either paid by check or deposited into a non-retirement account, depending on the custodian’s money movement options. Individuals with Traditional, SEP, and SIMPLE IRA plans generally must take their RMD when they reach age 72 (age 73 if they turn 72 after December 31st, 2022), regardless of whether they’re retired. Workers who hold workplace retirement accounts can typically delay their RMD until they retire, unless they own at least 5% of the company that sponsors the plan.
RMDs for IRAs: How They’re Calculated
If you’ve reached the age to begin taking RMDs, you may wonder how much you owe and how that amount is calculated. The required minimum distribution amount is calculated by dividing the fair market value of the plan by an IRA life expectancy table. Plan custodians must notify plan holders of the RMD amount, though it is the plan holder’s responsibility to request the distribution. Typically, individuals can expect to receive a 5498 tax form, an informational document outlining the fair market value as of December 31st, and any RMD obligations.
It’s important to note that since RMD is calculated using the fair market value of the retirement plan, individuals who hold multiple plans may receive multiple RMD amounts. Retirement plan owners are responsible for taking the correct RMD amount on time yearly. If you’re unsure of the best strategy for fulfilling your RMD obligations, a financial planner can provide insight and resources for your specific situation.
When to Request to Prevent Penalties
IRA plan holders must be proactive and up-to-date on IRS guidelines to prevent penalties. If the account owner doesn’t take their RMD on time, the amount not distributed is generally subject to a 50% excess tax penalty. The Secure Act 2.0 lowered the excess penalty amount to 10% to 25% if the RMD is corrected within two years. However, even a reduced excess penalty can cut into retirement savings and can be avoided by understanding when to request the funds to satisfy IRS guidelines.
Contact a Financial Advisor for Retirement Guidance
If you’re ever unsure if you need to begin taking your RMD, it’s always a good idea to err on the side of caution and reach out to a Davis Capital Management financial advisor for guidance. You worked hard for your retirement savings. By understanding RMDs and reaching out to a professional with questions, you can confidently use IRAs as the retirement resource they were designed to be.
For more information on IRAs and retirement planning, call Davis Capital Management at:
586-930-0039 Ext. 700.
Sources:
irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
2019 study from the LIMRA Secure Retirement Institute