The tax deferred party doesn’t last forever. RMD – Required Minimum Distributions Loom for Retirees. When we spend a big part of our life building our retirement portfolio, especially those who were able to meet their financial independence goals and retire early, that portfolio most likely has considerable assets in tax deferred IRAs and/or 401K  accounts. It is important to realize any tax consequences that come into play. It can be worse than expected depending on our IRA/401K portfolio size.

Fortunately the SECURE Act changed the RMD age from what was 70 1/2 to age 72 starting in 2020. Now the Secure Act 2.0 boosts that age to 73 starting in January 2023, age 74 in 2030 and age 75 in 2033. 

RMD may push us into higher tax brackets than planned for in our post 73 age once we begin our mandatory annual withdrawal and tax obligations. For some who have enjoyed keeping their income below thresholds to allow their Social Security to be non-taxed, Something new will also occur. They may also have the added pleasure of pushing their income over the low Social Security income thresholds, causing Social Security to also be taxable.

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Required Minimum Distributions Loom for Retirees- What to Know

We generally must start taking a predetermined percentage of our IRA/401K portfolio when we reach age 73. Fortunately our Roth IRAs are not required to have RMD withdrawals. Required withdrawals aren’t until after the account owner’s death and are not part of RMD.

Another exception to age 73 RMD is the Qualified Longevity Annuity Contract (QLAC). It allows delaying RMD on any QLAC investment up to age 85. QLACs are a new longevity annuity created by the US Treasury Department in 2014. This RMD tax treatment is what sets it apart from other annuities. Check out my page on the QLAC if you are not familiar with it.

Our required minimum distribution is the lowest amount we must withdraw from our account(s) each year. If our retirement lifestyle IRA withdrawals already surpass RMD minimums then we are good to go. We have met the RMD requirements. Fail to meet RMD minimum requirements and a punishing penalty of 50% awaits us.

How RMD- Required Minimum Distributions is calculated.

The required minimum distribution (RMD) for any year is based on your IRA/401K account balance(s) as of the end of the previous calendar year. Then it’s divided by a distribution period factor from the IRS’s “Uniform Lifetime Table.”

RMD (required minimum distribution) Uniform Lifetime Table and Calculation Steps:

To calculate the year’s RMD required minimum distribution amount,

Step 1– You take the age of the retiree at that EOY (Dec. 31) and then match to the associated distribution period factor.

Step 2- Divide the value of the IRA (IRA/401K owned by the RMD Retiree) by the distribution period factor to get the required minimum distribution for that year.

Step 3- Repeat steps 1 and 2 for each of your IRAs/401Ks.

Other Key RMD- required minimum distribution details.

• The Deadline for taking your required minimum distribution for the Year you turn age 73 is by April 1 of the following year.
• All later years (age 74, 75, 76, etc.) must be taken by December 31st of that year.
• The IRA Balance used in your RMD calculation is based on your December 31 balance of the previous year. If your accounts nose-dived after the first of the year it does not matter. The idea is making the calculation, withdrawing at least that amount and paying your taxes. It allows you to decide from which IRAs/401K assets that you own to take the withdrawals from. You can still manage withdrawals and maintain your portfolio asset diversity balances.

In Closing

Knowledge is power. If you have a larger IRA/401K portfolio then being aware that  Required Minimum Distributions Loom for Retirees may help you create a withdrawal and tax strategy. Before you reach the RMD age of 73.