As you approach retirement, there’s an important financial milestone you’ll need to prepare for, even if it’s still years away: your Required Minimum Distribution (RMD). By understanding RMDs and how you can potentially reduce them, your Allworth advisor can help you avoid costly mistakes and make the most of your savings. Here’s a straightforward guide to help you get started.
RMDs are withdrawals the IRS requires you to take from certain retirement accounts once you reach a specific age. These accounts include Traditional IRAs, 401(k)s, and similar tax-deferred accounts. The purpose of RMDs is to ensure the government eventually collects taxes on the income you’ve deferred over the years.
One exception is Roth IRAs, which don’t require RMDs during your lifetime. This feature makes them an attractive option for retirees looking to minimize taxable income.
The age for starting RMDs depends on your birth year. As of 2024:
Your first RMD is due by April 1 of the year after you reach the required age. Keep in mind that delaying your first withdrawal means taking two RMDs in the same year, which can significantly increase your taxable income.
Your RMD amount is based on the balance of your retirement account as of December 31 the previous year, divided by a life expectancy factor determined by IRS tables. For example, if your account balance is $500,000 and your life expectancy factor is 26.5, your RMD would be $18,867.92. But don’t worry, your Allworth advisor is here to do the math for you and make sure your RMD is taken on time.
If you have multiple accounts, we calculate the RMD for each. For IRAs, you can withdraw the total amount from one or more accounts. However, for 401(k)s, the RMD must be taken separately from each account.
RMDs are taxed as ordinary income, which means they’re subject to your marginal tax rate. Depending on the amount, they can push you into a higher tax bracket, increase the taxation of your Social Security benefits, and even raise your Medicare premiums. To reduce the tax impact, your Allworth advisor can work with you to develop a withdrawal strategy that aligns with your goals.
Several strategies can help you manage RMDs effectively:
Preparing for your RMDs doesn’t have to be stressful. Your Allworth advisor is ready to guide you through tax planning, help you create a withdrawal plan, and work with you to make sure your RMD strategy fits seamlessly into your overall financial goals.
Taking your first RMD is a significant step in retirement, but it’s one you don’t have to face alone. With careful planning and the right guidance, you can make the most of your hard-earned savings and enjoy the retirement you’ve worked so hard to achieve.
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