RMDs (Required Minimum Distributions) may have been mentioned by your financial or insurance professional, yet most retirees don’t fully grasp how they work. RMDs are mandatory withdrawals from retirement accounts such as traditional IRAs, 401(k)s and Roth IRAs that start when you reach age 7012 to ensure the IRS that funds in those accounts don’t linger beyond your lifetime.
Your pretax retirement accounts (IRAs and 401(k)s) typically can be tax-deferred until reaching RMD age, but then that changes: money in your IRA must be withdrawn annually or you risk penalties from the IRS.
Many investors understand the RMD rules for IRAs and 401(k) plans, yet few realize some annuities may also meet RMD rules. An immediate annuity that begins making payments immediately does not count toward RMD calculations as its payments remain level throughout its lifespan; to comply with RMD calculations would require splitting this contract up into multiple annuity contracts with various payout periods to meet RMD amounts.
Variable annuities with guaranteed interest accounts can also make an effective RMD vehicle, and can typically be found in most brokerage firms. While more costly than their counterparts, guaranteed interest accounts guarantee you a certain rate on investments made with initial deposits that accrue monthly to your contract and can help determine your RMD by dividing account balance at end-of-year by IRS life expectancy tables.
Assuming you inherit an IRA can present unique RMD challenges. According to regulations, beneficiaries must start taking their first RMDs by April 1 of the year after reaching their RMD age (typically 73). It’s important to remember, though, that this only applies if the original owner did not take his or her RMD by December 31 of their year of death – if unsure on how best to calculate this figure contact an expert in finance or insurance for assistance.
Reminders about RMDs as taxable income should also be kept in mind, and may put you into higher tax brackets than desired or needed, potentially increasing Social Security and Medicare taxes. To keep the amount of your RMD under control, try using Qualified Charitable Distribution (QCD). A QCD allows up to $105,000 of funds in an IRA that are transferred directly into charities without counting toward your RMD amount; please see our Inherited IRA RMD article for more details on this option.