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Calculating Required Minimum Distributions (RMDs) for IRAs: A Breakdown

Determine your Required Minimum Distributions (RMDs) using our guide and straightforward calculator to steer clear of costly tax penalties associated with your tax-deferred traditional IRA.

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Guidelines for Determining Annual Mandatory Distributions from Individual Retirement Accounts...
Guidelines for Determining Annual Mandatory Distributions from Individual Retirement Accounts (IRAs)

Calculating Required Minimum Distributions (RMDs) for IRAs: A Breakdown

In the realm of retirement planning, Required Minimum Distributions (RMDs) are a crucial concept to grasp. These are the minimum annual withdrawals you must make from most tax-deferred retirement plans, excluding Roth accounts.

The Importance of RMDs

Taking two RMDs in one year creates two taxable events, which could increase your taxable income and potentially push you into a higher tax bracket. Therefore, it's essential to plan your RMDs carefully.

Starting RMD withdrawals at the right age is critical, and the age for RMDs has been increased from 70-1/2 to 72 in 2020 due to the SECURE Act. However, the SECURE 2.0 Act raised the RMD age to 73 for individuals who turn 72 on or after January 1, 2023. Starting in 2033, the RMD age will increase to 75 for individuals who turn 74 after December 31, 2032.

You must take your first RMD by April 1 of the year following the year you turn 73. Officially, RMDs are due by December 31 each year, but the IRS gives you flexibility for your first RMD. You can delay your first RMD until April 1 of the following year.

Calculating RMDs

RMD calculations for a traditional IRA can be done using a DIY method or a simple RMD calculator. Fidelity's RMD tool is a recommended calculator for calculating RMDs, as it accounts for your spouse's age and projects your RMDs for future years.

Inherited IRAs

For inherited IRAs, the rules vary based on when the original account owner passed away, the beneficiary's relationship to the account holder, and whether the death occurred before or after January 1, 2020.

For deaths after December 31, 2019, most non-spousal beneficiaries must withdraw all funds within 10 years, with specific RMD requirements for eligible designated beneficiaries. Spouses who inherit a Traditional, SIMPLE IRA, Rollover, or SEP-IRA from their spouse have multiple options, depending on whether their spouse died before or after their RMD start date.

Penalties for Incorrect RMDs

The IRS imposes penalties for taking RMDs that are too small. If you withdraw less than required, the IRS charges a 25% penalty (or 10% if corrected within two years) on the difference between what you withdrew and what you should have taken.

Seeking Professional Advice

It is recommended to seek the advice of a financial services professional before making any investment or significant financial decision. The IRS website provides additional information on RMDs, such as what they are, the types of retirement plans that require RMDs, the timeline for taking minimum distributions, and how the amount is calculated.

In summary, understanding RMDs is a vital part of retirement planning. By knowing the rules and regulations, you can ensure you're making the most of your retirement savings while avoiding potential penalties.

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