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Navigating the Ever-Changing World of RMD’s

By Michael Jamison, Managing Partner & Portfolio Manager

A Review of RMD’s

RMDs, or required minimum distributions, have long been a confusing aspect of retirement planning and a pain point for investors. Even more frustrating is the fact that the rules and regulations surrounding them are continuously changing.

When you contribute to a retirement account, that money grows tax-deferred for decades. RMDs are how the government calls to collect. IRA holders, when they reach a certain age, must begin withdrawing taxable income from their accounts.

Your RMD amount is based on the previous year-end balance of your account, as well as your life expectancy. Advisory firms are required by law to provide clients with their RMD amount by the end of January, to give ample time to plan.

Some will choose to take the RMD amount in equal installments, either monthly or quarterly. Others will opt for a lump sum payment. The government doesn’t care how you distribute the money if the full amount is withdrawn by December 31 of the applicable year.

Recent Changes to RMD’s

For decades, investors were required to begin RMDs at age 70 ½. Then, in 2019, the Secure Act raised that number to 72. Just the next year, the Secure Act 2.0 was introduced, raising the age to 73. And in 2033, it will rise again to 75. The newer Act also lowered the penalty for not satisfying your RMD from 50% of the amount not taken to just 25%.

Additionally, account holders now have the option of making a qualified charitable donation, or QCD to satisfy their RMD requirement. IRA holders can begin doing this at age 70 ½. Individuals can also use QCDs to start lowering the balance of their account before RMDs must be taken. This helps to minimize the RMD amount they will be on the hook for when they reach 73.

Start Planning Now

Perhaps the most important aspect of planning for RMDs is the fact that advisors and brokerages can only see the RMD for the accounts they manage. If an investor has their funds spread across multiple money managers, they will have to compile all their retirement accounts to get their full accurate RMD amount.

Notably, account holders also have the option to take RMDs from any qualified retirement account. For instance, if an investor has three accounts with a total aggregate RMD of $50,000, they can choose to take their full RMD from just one of the accounts, instead of spreading it across all three. However, this strategy is not permitted for company plans, such as 401(k)s or 403(b) accounts. It’s also worth noting that only traditional IRAs are subject to RMD requirements, as Roth IRAs are funded with post-tax dollars.

Those born between 1951 and 1959 will need to start RMDs at age 73; for those born in 1960 or later, age 75. If you have any traditional IRAs, it’s best to stay informed on changes to RMD policies and plan.

To prepare yourself for your RMDs, schedule a consultation with Griffin Asset Management today.