Stay Away from these Three Common Pitfalls in Required Minimum Distribution (RMD) Calculations
Unwrapping Required Minimum Distributions (RMDs): A Steer-by-Steer Guide
Navigating the world of Required Minimum Distributions (RMDs) can be a daunting task, especially for newbies. But don't fret! By avoiding these three blunders, you can sidestep costly tax penalties.
1. sidestepping your RMDs
The cardinal sin of RMDs is simply not taking them as scheduled. Typically, you need to withdraw your RMDs by Dec. 31, yet you have until April 1 of the succeeding year to take your first RMD. For example, if you turn 73 in 2024, you've got till April 1, 2025, to make your 2024 RMD. But if you've yet to take yours by then, you'll be compelled to take two RMDs – one for 2024 and another for 2025 – in a single year.
Fortunately, you don't need to withdraw RMDs from Roth retirement accounts or from any 401(k) if you're still employed there and hold less than 5% of the company shares. In such cases, your RMDs from this account commence at the year following your resignation.
Calculating RMDs is relatively straightforward. Simply take your account balance at the end of the past year – say, 2023, for your 2024 RMD – and divide it by the distribution period beside your age in the Uniform Lifetime Table. For instance, if you're 75 with a $100,000 IRA balance, you'd divide $100,000 by the 24.6 distribution period for 75-year-olds to obtain an RMD of $4,065.
If you fancy lumping all your IRA RMDs together, go ahead. For example, if you're required to withdraw $4,000 from one IRA and $6,000 from another, you can take $10,000 from one, $5,000 from each, or any preferred combination, as long as you withdraw at least $10,000.
However, you can't lump together 401(k) RMDs. You must withdraw an RMD from each 401(k) in your name separately. To minimize the number of 401(k) RMDs you need to take in future years, consider rolling one or more of them into a more recent 401(k) or an IRA.
2. delaying your remedial action on missed RMDs
Not taking your RMD prompts the IRS to finesse a 25% tax penalty on the unwithdrawn amount. So, if you were scheduled to take out $10,000 from your accounts but didn't withdraw any, you'd owe the IRS $2,500 as a penalty. That's probably more than you'd pay in income taxes if you'd taken your RMD as planned.
Nonetheless, if you unintentionally forget to take your RMD, you have the chance to reduce that penalty by acting promptly. Taking your RMD as soon as you realize your oversight and filing an amended tax return with the IRS within two years will drop the penalty to a more palatable 10%. Although it's still not ideal, in our example above, it would save you $1,500 in penalties.
3. misinterpreting qualified charitable distribution (QCD) rules
Qualified charitable distributions (QCDs) provide an opportunity to bypass RMDs, especially if you're required to take them. This comprises donating your RMD to a qualifying charitable organization. Although you'll still need to withdraw the money, the IRS won't include it in your taxable income for that year.
The fundamental rule for QCDs, apart from meeting the RMD deadline, is that the money cannot pass through your hands first. If you withdraw the funds yourself and then donate them to the charity, you might be able to report this as a deduction on your return. However, it won't count as a QCD.
To qualify as a QCD, you must notify your retirement plan administrator of where you wish to send the funds so they can transfer them for you. It's advisable to avoid waiting until close to the tax deadline to do this, as it might take a few days for your funds to transfer. If you have any queries about RMDs or QCDs, it's best to contact a tax expert in your area for personalized guidance.
To effectively manage your retirement finances, consider strategic planning for your Required Minimum Distributions (RMDs). As you approach retirement, it's essential to think about how these distributions will impact your income and overall financial strategy.
In the pursuit of financial security, some retirees might consider various options for managing their RMDs, including exploring the potential benefits of delaying or charitably donating a portion of their distributions. Making informed decisions about RMDs can contribute to a more financially stable retirement, especially when it comes to preserving your retirement savings and minimizing tax liabilities.
%20Calculations){kind=link}