Sometimes Uncle Sam can be a really nice guy. He lets you save money in tax deferred accounts such as IRAs, 401(k)s and the like. You get to watch that money grow over the years, accumulating in value, while not paying any taxes on the gain. Uncle Sam just waits patiently on the sidelines not collecting taxes on the earnings. However, Uncle Sam isn’t going to wait forever, and that is where the Required Minimum Distribution comes in.
What is a Required Minimum Distribution (RMD)?
What if you never had to tap into your IRA? What if you had enough money from pensions and in taxable accounts so that you could just let your IRA sit, unused forever? Well then, Uncle Sam would never get his tax money would he? He has been a nice guy up to this point, but he has his limits, he wants to see some tax revenue, and he has decided that when you turn 70.5 is as late as he is willing to wait to start to see it.
When– Once you turn 70.5 you will be required to take money out of your IRA. The fact is many people will have already been taking money out of their IRA, and probably paying taxes and the earnings, but if you have not, you must at 70.5. For more details I will be writing a blog post entitled “When do I have to take my RMD?”
How much – It is the minimum amount that Uncle Sam says you must take out of your tax deferred accounts (IRAs, 401(k)s and the like) each year. The figure is based on the value of your tax deferred accounts on the last day of the year and calculated based on your life expectancy. For more details on I will be writing a blog post entitled “How much will the Required Minimum Distribution (RMD) be?”
Why – So Uncle Sam can finally get his hands on the tax revenue which has been deferred all these years.
IRA money is for your retirement income
You are investing money in your IRAs and 401(k)s for a reason, to use during your retirement years. For many families, they will be taking enough money out of their account each year to cover their living expenses anyway, more than the amount that they need to take out for the Required Minimum Distribution. Especially as we see fewer and fewer pensions. However, it is good to know the details because the penalty for not taking your Required Minimum Distribution (RMD) is quite steep. It is 50% of the RMD amount that should have been taken but was not.
Required Minimum Distribution (RMD) blog post series
Required Minimum Distributions generate many questions so I am creating a series of blog posts to address these questions: