How to calculate your first RMD? Most people have heard about RMDs in passing yet are not quite sure what, exactly, this acronym stands for. RMD is short for required minimum distribution. RMDs are the amount of money an individual must withdraw every single year from his or her retirement plan account after reaching 72 years of age (or age 70.5 if born on or before June 30, 1949).
RMDs have the potential to be complicated so don’t be afraid to reach out to a fee-only fiduciary CERTIFIED FINANCIAL PLANNER™ Professional for guidance with your retirement planning. You will benefit from a comprehensive financial plan tailored to your unique financial situation that is designed with RMDs in mind.
RMDs are Dynamic Rather Than Static
RMDs are constantly evolving and changing, meaning they are quite dynamic. RMDs have morphed in recent years and will likely continue changing in the future. As part of your estate planning, it is in your interest to be aware of the rules pertaining to RMDs to minimize your tax burden.
Furthermore, knowledge of RMD rules also helps you avoid a considerable penalty stemming from the tax code. Failing to take the full amount of the RMD triggers a penalty that is half the amount that should have been distributed from the IRA yet was not. This penalty is tacked onto the income taxes applicable to the distribution.
Changes to RMDs in 2019, 2020 and 2021
RMDs applicable to 401(k)s, IRAs, and other retirement accounts were suspended throughout 2020 as a result of the pandemic. However, this suspension did not carry forth in ’21. Congress is refusing to suspend RMDs unless another significant event occurs such as a steep stock market decline.
The starting age for RMDs was altered in 2019. It is important that you are aware of the beginning age applicable to you. Those who turn 70.5 prior to 2020 were to take their first RMD by the first of April after turning 70.5. However, those who turned 70.5 after ’19, were to have taken their first RMD by the first of April of the year after turning 72. However, RMDs were suspended in ’20, meaning those who reached age 72 in ’20 were empowered to skip the first RMD in ’20.
Those who turned 72 in ’20 might have some confusion in regard to whether ’21 RMDs are to be taken by the final day of the year in ’21 or the first of April in ’22. This is the first RMD taken as the ’20 distributions were suspended.
However, the April 1st deadline is likely inapplicable to the ’21 distribution for those who hit 72 years of age in ’20. The ’21 RMD is actually the second RMD. When in doubt, err on the side of caution by taking the ’21 RMD by the final day of the ’21 calendar year if you turned 72 in ’20.
If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72. However, this is the RMD for the calendar year in which an individual turns 72-years-old. Therefore, it may be prudent to take the RMD by the final day of the year when one turns 72 as an RMD must be taken by the final day of each year after the year the individual reaches 72 years of age.
As an example, consider an individual who turns 72-years-old in ’21. This individual is empowered to wait to take the initial RMD until the 1st of April ’22. However, he or she will be required to take the second RMD by the final day of the year in ’22. In other words, such an individual will be required to take two RMDs in ’22.
Such an action has the potential to elevate you to an even higher tax bracket and also result in higher Social Security benefits being taxed as well as an elevated Medicare premium surtax to boot. The better strategy might be spreading out the RMDs across several years by taking the initial RMD by the endpoint of the year in which one reaches the starting age rather than by the first of April in the year that follows.
RMD Calculations in ‘21
RMDs applicable to 2021 are determined by taking the balance of the IRA as of the last day of the year in ’20. This balance is divided by the life expectancy for one’s age as detailed in the IRS tables. Such tables are located at the end of the IRS Publication 590-B, also referred to as Distributions from Individual Retirement Arrangements.
The majority of people rely on Table III as Table II is optimal for those who own an IRA and have a spouse who is more than a decade younger in age and the lone beneficiary of the IRA.
The number generated from the calculation tied to the above-referenced tables is the minimum amount that must be distributed from the IRA by the last day of the year. Though a larger distribution can be taken if one desires or needs the funds, any amount of money distributed that exceeds the RMD is not used as a reduction/credit when calculating the RMD for the next year. Rather, the IRA balance as of the last day of the year ’21 will be used to calculate the RMD for ’22.
New Life Expectancy Tables
The information detailed above is applicable to current life expectancy tables that have been in use for years. The IRS published new proposed regulations complete with new tables in the initial months of ’20. These tables have longer life expectancies. The regulations were revised and finalized by the final months of ’20.
These new life expectancy figures will be used in tables applicable to ’22 RMDs so there is no need to worry about those at the current moment. However, a fee-only fiduciary will certainly prove helpful for high net worth retirement planning as time progresses.
What About Multiple IRAs?
Those who have more than one IRA can calculate the RMD for each of those accounts separately. At that point, the calculated RMD from the IRAS can be added in what is referred to as aggregating. This aggregated IRA RMD can be taken in the proportion desired. The full RMD can be taken from a single IRA.
The RMD can be proportional from each account or equal to the amount taken from individual IRAs. Furthermore, you can choose another allocation you desire as long as the sum equals the aggregate RMD applicable to the year.
The only caveat is the aggregate approach is restricted to traditional IRAS. The RMD must be computed separately for 401(k) accounts and other accounts related to employment. Finally, there is no need to take a single lump sum at the year’s end.
RMDs can be taken in fixed installments throughout the year or at selected intervals. Some individuals choose to have IRA custodians transmit monthly checks in equal amounts that add up to the lowest RMD for the year. If you have any questions or concerns about RMDs, do not hesitate to reach out to your financial advisor for professional guidance.
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