What’s Your Retirement Distribution Plan?

If you were supposed to take out an RMD of $4, 000 from your retirement accounts and somehow forgot to do this, you’ll be writing the IRS a check for $2, 000. Ouch! This is something you can easily avoid, says Yahoo Finance’s article “Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS.”

Most investors spend a lot of time building their retirement income accounts—their entire working life. However, there’s a second phase of retirement finances that doesn’t get quite as much attention. That’s the “distribution” phase, when the money that you put into accounts for decades needs to be taken out and used for what is ideally an enjoyable retirement.

Preparations for this phase are usually focused on where to live, how much travel you can afford, what interests you may pursue and the choices that are made regarding retirement spending.

With those choices come some fixed payments that you need to keep in mind as you budget. The IRS has rules about Required Minimum Distributions, or RMDs, that are strict. While some of the rules changed as of January 1, 2020, the penalties have not. Starting at age 72, you have to take your RMDs, or pay a steep price.

Here are the main types of accounts that have RMDs: IRAs, 401(k)s, 457 plans, SEPs, SIMPLE IRAs, TSP, 403(b)s, and TSAs. They all require RMDs in retirement.

The first distribution must be taken by April 1 of the year following the calendar year that you turn 72. If you retire after age 72, you have to take your first RMD from your 401(k), profit-sharing 403(b) or other defined contribution plan by April 1 of the year after the calendar year in which you retire.

For subsequent years after your required beginning date, you have to take your RMD by December 31.

You don’t have to take any RMDs for Roth IRA accounts, since those accounts are funded by post-tax dollars. There are Roth retirement accounts that do have RMDs, like a Roth 401(k). Some people roll their Roth 401(k) into a Roth IRA and pay the taxes at the time of the rollover, anticipating high taxes in the near future.

If you don’t take your RMD, or don’t take a large enough distribution, the IRS penalty is 50% of the amount that was not withdrawn.

To calculate your RMD for 2020, divide your retirement account balance on December 31, 2019, by a “distribution period” factor based on your age. For example, Lisa Sue is 71 and must take her first distribution at age 72. Her year-end IRA balance for the prior year was $100, 000. Her distribution factor is 27.4. Divide $100, 000 by 27.4 and the amount of the RMD is $3, 649.63. That’s her RMD.

Understanding the distribution phase of your retirement is as important as the savings phase. While you’re planning, don’t neglect the estate plan that needs to be updated or prepared. That includes a will, power of attorney, medical power of attorney and other documents. Talk with an experienced estate planning attorney to create a plan to protect yourself and your loved ones.

Reference: Yahoo Finance (Jan. 9, 2020) “Know These 3 Facts to Avoid Paying Half Your Retirement Income to the IRS”