By Daniel Baumgartner & Petra Peters
If you had the idea that during your retirement, you could simply withdraw money from your retirement accounts as needed, you might be in for a surprise. The IRS requires individuals to initiate withdrawals from their retirement accounts, known as required minimum distributions (RMDs), starting at age 73.
If you’re interested in gaining more knowledge about RMDs, you’ve come to the right place. In this article, we provide key insights and information on RMDs so you know how they fit into your investment strategy and what to do when it’s time to withdraw funds.
What Are Required Minimum Distributions?
RMDs are the minimum amount you must start withdrawing from your retirement accounts once you hit age 73, per the IRS. These accounts include:
- 457 plans
- SEP IRAs
- SIMPLE plans
The only account that isn’t subject to RMDs is Roth IRAs because those are funded with after-tax dollars. However, you must take distributions from other types of Roth accounts, such as Roth 401(k)s.
How Much Will I Have to Withdraw?
The specific amount you’re required to withdraw depends on two things: the total amount you had in your account on December 31st of the previous year and your average life expectancy (as determined by the IRS).
4 Things You Should Know About RMDs
1. RMDs Must Be Taken by December 31st Every Year
Your annual RMD must be taken by December 31st every year to avoid a penalty. If you miss this deadline, you’ll pay a hefty 50% tax on the funds you should’ve withdrawn.
2. You Must Take Your First RMD by April 1
Although RMDs are due December 31st, you can delay your first one until April 1st of the following year. So, if you turned 73 in 2023, you can wait until April 1, 2024, to make your first distribution.
But waiting this long could push you into a higher tax bracket because you’ll take two distributions in one year. To be safe, crunch the numbers to find out when it makes sense for you to take your first RMD.
3. You Could Defer RMDs if You’re Still Employed
401(k)s have a “still working” rule which prevents 73-year-olds from having to take RMDs if they’re not retired. There are exceptions, of course. You can only delay RMDs for your current employer-sponsored plan. If you have IRAs or 401(k)s from previous employers, you’re required to take distributions for those.
4. You Can Reduce Your Taxes By Redirecting Your RMD to Charity
Redirecting your RMD to charity is a great way to give back and reduce your tax burden at the same time. Thanks to qualified charitable distributions (QCDs), which became a permanent provision in the tax code in 2016, RMD donations are not reported as taxable income on your tax return. So, if your RMD is $3,000 and you donate $3,000 to charity, you won’t pay any taxes that year.
It’s important to note that not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year in which the charitable contribution is made.
Work With a Professional
Understanding the ins and outs of required minimum distributions can pose many questions for you, but being informed is the key to turning this obligation into a strategic advantage. At Terra Nova Asset Management, our goal is to educate and support our clients in creating a tax-efficient strategy for withdrawing funds during retirement.
For more information about our services or to discuss your specific financial situation, feel free to reach out to us directly at 212-355-1234 or email@example.com for the New York office (Petra) or 855-248-6630 or firstname.lastname@example.org for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.