Retirement withdrawals, particularly Required Minimum Distributions (RMDs), can be an overlooked aspect of retirement planning. The rules governing RMDs have been frequently changing, especially regarding the age at which you must start taking withdrawals from your pre-tax retirement accounts and and how much and when you need to take distributions from inherited pre-tax retirement accounts. So let’s dive into the rules around RMDs, including the specifics of inherited pre-tax retirement accounts.
First: What Are RMDs (Required Minimum Distributions)?
RMD stands for Required Minimum Distribution. Owners of pre tax retirement accounts are required to take annual distributions once they reach a certain age and beneficiaries of pretax retirement accounts are also required to take distributions. But, how much you take and when depends on who inherited what from whom and when.
Why It’s Important to Understand RMDs for Retirement Withdrawals
Missing the annual distributions means stiff penalties, so knowing these rules is important.
At the end of July 2024, changes were made, again, to the RMD rules and it’s important you note these changes so you can avoid costly mistakes with your retirement withdrawals.
When to Take RMDs from Your Own Pre-Tax Retirement Accounts
This depends on your birthdate. If you were born between 1951 and 1959 you need to take your RMDs at age 73
If you were born after 1959 you need to take your RMDs at age 75.
What Accounts Do You Need to Take RMDs from?
If you have pretax retirement accounts you’ll need to take RMDs from them in the year AFTER you reach your RMD age. So, if you are required to take distributions because of your age, you must take the first distribution by April in the year following the year you reach your specific age.
For example, if you reach the RMD age in 2024, your first distribution must be taken by April 1, 2025.
Depending on the type of pre-tax retirement account, you may be able to aggregate the values of accounts as of December 31 of the prior year to determine what your total RMD for the year is and then take that RMD from any account or every account.
For example, if you have several pretax IRAs and your RMD was $50,000, you could take all of that from any one of these accounts, or you could evenly distribute the distributions. However, there are some account types that require you to take a distribution from them every year. If you have a 401k , 457, or defined benefit account you must take the RMD for that account only from that account annually. You can aggregate 403b accounts and take the RMD from one or all of them.
RMD Rules for Inherited Pre-Tax Retirement Accounts
If this isn’t confusing enough, consider the rules for RMDs for inherited pretax retirement accounts, which just changed in July.
First this will depend on how you were related to the person you inherited the account from. If this was a spouse there is one set of rules. Were you 10 years younger than this spouse? When did your spouse die? Depending on the answer the rules will change.
If you are not a spouse and not considered an “eligible designated beneficiary” the rules will change. Was the person you inherited the pretax account from already taking their RMDs, or not? This will change the RMD rules.
Because the rules are so convoluted we suggest you reach out for guidance when you have a specific case so that you are taking the correct amount when you need to.
‘I Missed Taking My Retirement Withdrawal’: Penalties for Missing RMDs
Penalties for missing RMDs were just reduced to 25% of the RMD, and this penalty is over a 3 year period. The statute of limitations runs out after 3 years. This penalty is down from the prior 50%. If you realize you’ve missed the RMD there may be a way to get the penalty waived by filing form 5329 with the IRS. We’d suggest reaching out to your CPA for help here.
Why Work with a Financial Planner?
RMDs and retirement withdrawals can be a minefield, with rules that change frequently and complexities that vary depending on your specific situation. Working with a financial planner can provide you with personalized advice, ensuring you’re taking the correct amounts at the right times and avoiding unnecessary penalties.
At WealthChoice, our mission is to help you live the life of your dreams through strategic financial planning, investment management, and lifelong partnership. Whether you’re managing your own pre-tax retirement accounts or dealing with an inherited account, our experts can guide you through the process with confidence.
Pre-Tax Retirement Accounts Are Only One Part of Retirement Planning
Understanding RMDs and the rules surrounding retirement withdrawals is crucial to maintaining financial stability in retirement. With frequently changing regulations and potential penalties for non-compliance, it’s essential to stay informed and seek professional guidance when needed. Contact WealthChoice today to ensure you’re on the right path and fully compliant with all RMD rules, securing your financial future with confidence.
