I attended a Red Rocks concert a few years ago where the artist, after doing an excellent cover of a Tom Petty song, declared to the crowd, “As they say in Hollywood, if it’s worth doing once, it’s worth doing again.” At which point he launched into a cover of another Tom Petty Song.
And so go my thoughts about writing about RMDs. Again. Because questions, fears, concerns, gnashing of teeth all come around to me repeatedly about this subject (and its sassy little cousin IRMAA upcharges for Medicare Parts B and D).
So, for this month, I am going to focus on Required Minimum Distributions:
- Are RMDs the evil, retirement-ruining laws we are led to believe?
- What actions can be taken to lessen the tax impact of RMDs?
- Is it realistic to think you can manage to stay in a certain tax bracket for all of retirement?
- Who really needs to be worried about RMDs? Is it everyone? Only people with certain asset levels?
Of course, you will be getting my biases, opinions, and math. Ed Slott or Michael Kitces or Suzy Orman may have different thoughts. Heck, Snoop Dogg is probably out there with his learned opinions. Why not? He’s everywhere else.
So, to begin: What are Required Minimum Distributions and why do they exist?
An RMD is simply the minimum amount the government requires you to take out of tax-deferred retirement accounts (401ks, 403bs, 457, 401a & plans, SEP IRAs, Traditional IRAs, and SIMPLE IRAs) each year once you reach a specified age. For some people today, RMDs begin at age 73; for people born in 1960 or later, they begin at 75.
Required Minimum Distributions are taxable to you at whatever tax bracket you fall into in the year the withdrawals are made. You can always withdraw more than the required amount. In fact, most people do. They need the money to pay their bills.
RMDs are not a penalty or a gotcha or some huge surprise you never saw coming. The category of “tax-deferred” savings says it all: Taxes are deferred to a later date. That date is your age 73-75.
Why is this even a thing? On these tax-deferred accounts, you got to postpone paying income taxes on the money when you contributed it and while it was growing in the account. The government, however, didn’t intend for those taxes to be postponed forever.
The government especially doesn’t want wealthy investors to send tax-deferred money down the generations indefinitely. That is why the RMD formula is arranged so you will withdraw most of the tax-deferred assets by your life expectancy. If someone other than your spouse inherits, that person has 10 years from your death to withdraw what remains.
Next week: How much can I expect my RMD to be?
