It’s been a long time coming. The federal government has made substantial changes to the rules governing retirement account withdrawals, known as RMDs. As Americans are generally living longer and nest eggs are relied upon for additional years, an overhaul was certainly warranted.
The recent rules shift has the potential to offer more income planning flexibility for retirees and soon-to-be retirees alike.
Here’s what you need to know:
What is an RMD?
The abbreviation “RMD” stands for Required Minimum Distribution. It is the minimum amount of money the IRS forces you to withdraw every year from employer-sponsored retirement accounts like 401(k)s, 403(b)s, and Profit Sharing Plans as well as non-employer-sponsored retirement accounts like traditional IRAs, SIMPLE IRAs, and SEP IRAs once you reach retirement age.
Why the required withdrawals?
RMDs are a mechanism for the federal government to use in the generation of tax revenue. Basically, the IRS forces retirees to withdraw funds at set intervals, which in turn leads to taxes being paid, as RMD distributions are treated as ordinary income. The federal government does not want IRA and other retirement accounts to turn into legacy wealth creators. The intention was for these types of investment accounts to be used for retirement expenses. Therefore, distributions are required once you reach age 72.
When do RMDs kick in?
Currently, RMD age is defined as 72 years old. Prior to the passing of the SECURE Act in 2019, the age was pegged at 70 ½. The SECURE Act bumped the age up to where it currently stands – age 72. These numbers may change again in the coming years, as current legislation is in the works to raise the RMD age up to 75.
Potential benefits in retirement?
Smaller required withdrawals could lead to a decrease in your annual income during retirement. You may even drop into a lower tax bracket. Less annual income translates to a lower tax liability at year-end.
Having the option to leave more money in your retirement accounts also allows the opportunity for those funds to continue to grow. You have greater potential to stretch your nest egg over the years.
A few extra details.
- ROTH IRAs do not have RMD requirements.
- Inherited IRAs follow different rules than traditional IRAs. The distribution requirements depend on the relationship of the beneficiary to the original account owner. Spousal beneficiaries are treated differently than child beneficiaries, for example.
- An RMD is just that, a minimum requirement. You can certainly withdraw more than the amount dictated by the IRS in any given year if needed.
Interested in learning how the RMD changes may impact your specific retirement outlook? Don’t hesitate to reach out.