After The SECURE Act: 6 Rules You Need To Know About Mandatory Distributions From IRAs And 401(k)s
From: www.forbes.com
Retirement planning is about more than just saving money – it’s about generating an income plan for spending money. You can break saving for retirement into three main goals: automate savings as much as possible during working years; invest in long-term growth investments with low fees; and stay engaged and employed until you accumulate enough wealth. However, retirement income planning is often much harder, because we have less control over the end date of retirement.
It’s challenging to make a set amount of savings and wealth last for an uncertain period of time in retirement. Further complicating the matter is that the government gave us tax benefits to encourage retirement savings in 401(k)s and IRAs. However, the recently passed SECURE Act substantially changed the rules that govern our retirement accounts upon retirement and death. On one side, the government gave us some additional wiggle room before we have to start required minimum distributions by pushing the required beginning date back to age 72, from 70.5, for everyone that has not yet reached age 70.5 by the end of 2019. With RMDs the government is encouraging retirees to spend down these tax-deferred retirement assets in order to generate tax revenue.
These rules around required minimum distributions (RMDs) are some of the most important tax and retirement rules – failure to comply could cause big problems for your retirement security. Let’s take a look at six major points to understand about RMDs.
1. When Do They Start?
Your retirement accounts become subject to RMDs the year you reach age 72, for everyone that has not yet reached age 70.5 by the end of 2019. If you had already reached age 70.5 and were retired by the end of 2019, you will likely fall under the previous RMD rules as it pertains to your IRAs. If you are still working past age 70.5 or now 72 and enrolled in a 401(k) plan at work, it will be subject to RMDs the year you retire (if allowed by your 401(k) plan). However, if you are a 5% owner or more in the company, you will be subject to RMDs when you hit age 70.5 if prior to the end of 2019, and from January 1, 2020 on out when you reach age 72. IRAs are subject to RMDs at age 72, regardless of whether you are still working.
2. When Do You Have To Take Money Out?
You need to withdraw your RMDs by Dec. 31 of the year that it’s due. However, for the first year you owe an RMD, you have to take it by April 1 in the year following when you reach age 72. If you push your first RMD to the April 1 deadline, be aware you’ll have two RMDs for that year, as the following year’s RMD is still due by year end.
3. How Is My RMD Calculated?
Your RMD is determined by taking the prior year’s account balance on Dec. 31 and dividing it by your corresponding life-based factor in the IRS-provided Uniform Lifetime Tables. Most people use Table III. If your spouse is more than 10 years younger than you and is the sole beneficiary of the account, you can use Table II’s life factor, which lowers the RMD for each year.
You can aggregate IRAs to determine RMDs. However, with employer-based retirement plans, each plan must satisfy the RMD rules independently of each other. If you have three separate 401(k)s, you will need to take three separate RMDs, one from each account.
4. Major Penalty For Missed RMD
If you miss an RMD or take less than what you were required to take out from your IRAs or 401(k), the amount you were short can be subject to an additional 50% penalty tax. While there’s a self-reporting system and form for fixing missed RMDs, the form and process can be complex. It’s easier to meet your RMDs each year.
If you must miss an RMD, follow the self-reporting system. The IRS has been gracious in allowing penalty relief if the RMD issue was fixed, self-reported, you had reasonable cause for missing the RMD and you followed the process (Form 5329).
5. Distributions Are Taxable
Most money contributed to 401(k)s and IRAs is tax deductible. This is the government’s way of encouraging you to save for retirement. However, because the amount is deductible when it goes into the account, it’s typically taxable when distributed. Distributions from IRAs and 401(k)s are taxed as ordinary income. You need to understand how RMDs will impact your tax situation. One big thing retirees forget is estimated taxes. If you’re taking out RMDs, consider paying some taxes throughout the year to lessen the likelihood you underpay your estimated taxes and get penalized.
