By Eric Ellis | May 6, 2020 | Required Minimum Distribution
Remember putting together your kid’s toys on Christmas Eve?
Last year Santa brought the girls a playhouse. Assembly required. My original approach was a Tony Stark level of over-confidence. After I opened the box and saw the +200 pieces, my confidence drifted to worry. The instructions were in a different language. The design was confusing. It was midnight and nearly 30°. It made me want to give up.
Required Minimum Distributions (RMD) can make a lot of people feel the same way. It is new, not easy to understand, and can make you worried that you are not “doing it right”.
No worries. We’re here to help.
What is it?
If you are 72 (or older) and have one of the accounts below, congratulations! You have a required minimum distribution (RMD). An RMD is the minimum amount you must withdraw from your account(s) each year.
They apply to traditional IRA, SEP-IRA, SIMPLE IRA, 401(k), 403(b), 457(b), Profit-sharing plans, and other defined-contribution plans. Any account with pre-tax contributions.
You can withdraw more than the minimum required amount, it is your money after all. It is important to know any amount you take out of these accounts will be included in your taxable income (with this exception).
Why do I have to take an RMD?
The IRS has given you a tax incentive to save for your retirement. If you started saving at age 20 and retire at age 65, that is 45 years of taxes that have been deferred. You know Uncle Sam wants his “fair share”. The RMD is a way to force assets out of your tax-deferred accounts into taxable accounts. Plainly stated, it is a source of revenue for the government.
How is it calculated?
You’ll need two items.
- Your Balance. Take the sum of all of your accounts that qualify for RMDs (listed above) as of 12/31 from the year before.
- Your Age Factor. Find your factor based on your age as of 12/31 of the current year.
(Your Balance )/(Your Age Factor) = RMD
Simply divide Your Balance by Your Age Factor and voila! You have your RMD.
For example, Mike will be 75 by the end of the year and has three IRAs. One with $1,500,000, another with $450,000, and another with $50,000. His total balance is 2,000,000. His factor is 22.9. Mike’s RMD will be $87,336.24 ($2,000,000/22.9).
What if I don’t take my RMD?
The penalty for not taking your RMD is steep, it is 50% of your RMD amount. Let’s look at Mike from the example earlier. His RMD was $87,336.24. If Mike does not take his required minimum distribution (RMD) before the end of the year his penalty would be $43,668.10!!!
There is an exception for 2020 only due to COVID-19.
With some patience and help from YouTube, I was able to build Allie and Kate’s playhouse. Fortunately, you don’t have to stress through your RMD. You have us. We’re on your team. Lean on us as a resource. We will help you through it so you don’t have to worry.
Ellis & Company Retirement Strategists