As I approach closer to my normal retirement age (NRA) which in my case is 66 ½ years old (born before 1960). Like a lot of people, life happens, raising kids, loss of job, crashes in the stock market. Factor in inflation rates that top 8% last year, and not much better this year. And, like most Americans, I do not have the amount of funds in retirements accounts which would make a retirement non-stressful.
Keeping an eye on the stock market, my investments, and employment opportunities, all to maximize the amount of money I will have during the “golden years”. I put in 11% yearly of my pay into an active 401K account. This is matched by my employer totaling 5%.
As my funds increase, the question becomes, how much money will I have withdrawn from a 401K account in order not to get into trouble with the IRS.
What is the minimum withdraw amount.
When researching 401K investment strategies, withdrawals are one area that is not heavily talked about. Everyone talks about if you have $550K do this. Or invest in this strategy. Sign up with an advisor to talk about diversifying your portfolio. All these are good ideas and sound investment opportunities. But what about when the time comes to withdraw funds?
Required Minimum Distribution (RMD)
Checking with organizations like AARP, I found some interesting information about IRS requirements for withdrawals. The IRS requires that you withdraw at least a minimum amount – known as a Required Minimum Distribution (RMD) from some types of retirement accounts annually. The distributions are required to start when you turn age 73. This means you can allow your account to continue to grow until the rip age of 73. AARP provides a calculator for determining your withdraw amounts. AARP MRD Calculator
Reaching out to the IR, I received the following information.
Required minimum distributions (RMDs) are withdrawals you have to make from most retirement plans (excluding Roth IRAs). The age for withdrawing from retirement accounts was increased in 2020 to 72 from 70.5. The SECURE 2.0 Act, though, raised the age for RMDs to 73 for those who turn 72 in 2023. Therefore, your first RMD must be taken by April 1 of the year after which you turn 72 (73 in 2023). The amount you must withdraw depends on the balance in your account and your life expectancy as defined by the IRS. If you have more than one retirement account, you can take a distribution from each account or you can total your RMD amounts and take the distribution from one or more of the accounts. RMDs for a given year must be taken by December 31 of that year, though you get more time the first year you are required to take an RMD.
‘SECURE Act of 2019 and CARES Act of 2020’
The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act brought key changes to laws governing retirement plans. Among other things, the Act eliminated the age cutoff for traditional IRA contributions and increased the age for required minimum distributions (RMDs) from 70.5 to 72. The SECURE 2.0 Act would further adjust retirement laws to make saving more accessible for Americans.
Your required minimum distribution is the minimum amount you must withdraw from your account each year.
- You can withdraw more than the minimum required amount.
- Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
Which retirements plans does the RMD apply to?
IRS website IRS MRD indicates the minimum distribution rules discussed apply to original account holders and their beneficiaries in these types of plans:
- traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- profit sharing plans
- other defined contribution plans
- Roth IRA beneficiaries
The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table. The following can help determine the payout periods and the amount of your required distribution:
- worksheets to calculate the required amount.
- tables to calculate the RMD during the participant or IRA owner’s life:
- Uniform Lifetime Table – for all unmarried IRA owners calculating their own withdrawals, married owners whose spouses aren’t more than 10 years younger, and married owners whose spouses aren’t the sole beneficiaries of their IRAs
- Table I (Single Life Expectancy) is used for beneficiaries who are not the spouse of the IRA owner
- Table II (Joint Life and Last Survivor Expectancy) is used for owners whose spouses are more than 10 years younger and are the IRA’s sole beneficiaries
Inherited IRAs – if your IRA or retirement plan account was inherited from the original owner, see “required minimum distributions after the account owner dies,” below.
- Required beginning date for your first RMD
- IRAs (including SEPs and SIMPLE IRAs)
- April 1 of the year following the calendar year in which you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
401(k), profit-sharing, 403(b), or other defined contribution plan
Generally, April 1 following the later of the calendar year in which you:
- reach age 72 (73 if you reach age 72 after Dec. 31, 2022) or retire (if your plan allows this).
Generally, the answer is not straight forward. You will find on a web search quick advice of 4% per year. Like anything associated with the IRS since they have rules to cover rules to cover for every type of person or circumstances. To find out more and keep yourself from getting into trouble with the IRS. I would suggest consulting with a financial planner.
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