What are RMDs and how do they affect you?Thursday 11 June 2020 | Reading Time: 4 minutes
Tax deferrals that most IRAs, retirement and profit-sharing plans are afforded don’t last forever. Whether you’re ready for retirement income or not, IRS rules require that you start drawing down your savings from certain types of accounts when you reach a certain age. That age is 70 ½ for individuals born before July 1, 1949, and 72 for those born on or after July 1, 1949. Of course, navigating IRS rules can be a real puzzle, especially when it comes to figuring out required minimum distributions (RMDs). Here’s some info to help you navigate RMDs.
Know the Rules
What accounts do RMD rules apply to? RMDs apply to qualified retirement savings vehicles. The primary features of a qualified account are that they’re funded with pre-tax earnings, and the account value can grow on a tax-deferred basis.
Accounts like these could include:
- Employer-based retirement plans like a pension (defined benefit, 401(k), or 403(b)
- Profit-sharing plans
- Employee stock ownership plans (ESOPs)
- Traditional individual retirement accounts (IRAs)
- SEP IRA
- SIMPLE IRA
- 457(b) plans if money is deferred on a pre-tax basis
When it comes to RMDs, the minimum, annual payments will vary in size from person-to-person based on a number of factors, including your age and account balances in impacted accounts. To keep it simple, any year you end with an account balance in one or more of these accounts after you turn the specified age, you’ll be required to take a minimum distribution the following year. That income can be taken from:
- Your existing Midland National annuity or another company’s annuity
- Some other qualified savings vehicle like 401(k) or a traditional IRA
If you are drawing retirement income already, this may not be a big deal. However, you may not see RMDs as positive. For example, if you are still working, the additional income could lead to an unplanned tax obligation when marginal tax rates would make it more expensive. You may not even need the income, even in retirement.
Like a lot of tax-related issues, RMDs can be complicated, so talk to your tax adviser or financial professional before making any decisions. They can help you make calculations for the minimum distributions, and help you find options to minimize the impact of your RMDs or make the most of them.
Ideas for RMD Money
What Should You Do with Your RMD Money? Required minimum distribution rules require you to start drawing income from qualified retirement savings accounts by April of the year after you turn the specified age, whether you want to or not. While you must take the income, you choose what happens next. Here are some ways you may put that money to use:
Nothing’s stopping you from spending freely. Go on that trip you’ve been putting off. Finally, tackle that big kitchen renovation. Buy a new car.
Visit Your Family
If you have the time, what better way to use it and the money you’re looking to spend than to visit the kids or, even better, fly them to you? Maybe take a special trip to catch up with a family member you don’t see as often, or meet somewhere fun for a family vacation like the old days.
Spoil the Grandkids
You can give away the money from RMDs, but be aware that gift tax limits may apply. Consult with your tax adviser before putting your family members in a potential bind.
Pay for Tuition
You can use the money from RMDs to help pay for your grandchildren’s college education. Paying tuition directly to the school could avoid the gift tax concern.
Set the Money Aside for Emergencies
If you haven’t established a comfortable emergency fund, now could be a great time to bolster it.
The rules allow for RMDs to be directed to qualifying charities and could get entirely deducted from your taxes. You may avoid the increased tax liability and your favorite cause benefits, but be sure to talk with your tax adviser to find out.
Neither Midland National, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax or investment advice. Please rely on your own qualified tax professional.