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Required Minimum Distributions from Retirement Accounts

If you have a qualified retirement account, you may have heard the term ‘Required Minimum Distribution’, or RMD for short. Understanding Required Minimum Distributions is an important aspect of planning for your retirement. Whether you have an IRA, employer-sponsored plan, or even an inherited IRA, understanding RMD requirements will help ensure that you avoid unnecessary penalties and optimize your financial planning.

What is a Required Minimum Distribution and which accounts are subject to them:

A Required Minimum Distribution (RMD) is the minimum amount you must withdraw from your retirement accounts annually, starting at a certain age. Accounts subject to RMDs include Traditional IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and inherited IRA’s and Inherited Roth IRA’s. While Roth IRA’s do not require RMDs during the owner’s lifetime, beneficiaries of Roth IRAs must take RMDs. It is important to reference the IRS guidelines with all the recent changes to see what options you do have.

What amounts are required to be distributed:

The amount required to be distributed as an RMD depends on the account balance and the account holder’s age, with a set percentage of the account required to be distributed. This percentage increases as the account holder gets older. The IRS provides specific guidelines and tables to calculate these amounts.

Typically, you must take your first RMD by April 1st of the year following the year in which you turn 73, and by December 31^st thereafter. However, most people take them within the year they turn 73. Additionally, if your account is part of an employer-sponsored retirement plan, such as a 401(k), you do not have to take an RMD until you leave that employer. This exemption does not apply for those who have at least 5% ownership in the company.

Rules for inherited IRAs have undergone changes in recent years due to the passage of the SECURE Act and SECURE 2.0. Beginning in 2025, beneficiaries of inherited traditional and Roth IRAs will have to distribute those accounts over the course of 10 years.

Failing to take an RMD can result in significant penalties. The IRS imposes a tax penalty on the amount not withdrawn, which can substantially impact your financial situation. Understanding the consequences and ensuring timely RMDs is crucial for avoiding these costly penalties.

RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.

RMD Strategies and the Importance of Speaking with a Financial Advisor:

When considering RMD strategies, it is essential to plan wisely to minimize taxes and maximize the benefits of your retirement savings. One effective method is making Qualified Charitable Distributions (QCDs). These contributions can satisfy your RMD requirements while providing significant tax benefits, as the amount donated can be excluded from your taxable income while supporting an organization you believe in. Consulting a financial advisor can help you navigate these strategies and make informed decisions.

Conclusion:

Understanding and managing RMDs is vital for maintaining your retirement accounts’ health and ensuring you meet IRS requirements. Consider speaking with a financial planner near you to get personalized advice and ensure you’re on the right track.

Contact us today to connect with a trusted financial planner and take the first step toward planning for a confident financial future.

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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Reynolds Wealth Management is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Any opinions are those of Jefferson Hankins and Kurt Boggs and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.