Get Ready for RMDs
It’s time to start thinking about RMDs — those required minimum distributions that you must take from your retirement plans every year, once you reach age 72. Of course, those withdrawals can be made at any time of the year, but many people leave it to the last minute, which could be an expensive mistake.
Over your working years, you made tax-deductible contributions to your retirement plan — either a 401(k) or403(b) at work, or perhaps an Individual Retirement Account. And the money in those accounts has been growing tax-deferred over the years.
Now the government wants its share of that retirement windfall! You might not want to take any withdrawals, especially if you have other savings to live on. But the rules say that starting at age 72, you must withdraw a specific amount every year. That withdrawal is added to your ordinary income and taxed at your marginal tax rate.
(Technically, the rule states that you must make your first withdrawal by April 1 of the year following the year you reach age 72, but that would generate two RMDs in one year!)
The amount of your RMD is based on a formula that is designed to nearly draw down your account over your projected actuarial lifetime — based on the government’s Uniform Lifetime Table.
To find the amount of your RMD, just do a Google search for “RMD Calculator.” Many financial firms have online tools that allow you to input your age and the total balance in all your retirement accounts at the end of last December.
That may be especially painful this year, since most retirement accounts have followed the overall stock and bond markets to significant losses. Yet your 2022 RMD will be calculated on the value at year-end in December 2021. Thus, the percentage that must be withdrawn at your specific age might take a bigger chunk out of your now-smaller portfolio!
You don’t have to do the RMD calculation yourself. Just ask any of your retirement plan custodians to do the work for you. However, you must give them the total value of ALL your retirement accounts at the past year-end to make the correct calculation.
Where and when to withdraw
You can take your RMD from any one of your retirement accounts, or a bit from each one of them. As long as the total amount withdrawn adds up to the prescribed RMD, you’ll be fine. There’s a 50% tax penalty of the amount you should have withdrawn if you fail to take your full RMD.