5-common-questions-about-rmds-in-retirement

5 Common Questions About RMDs in Retirement

The Secure Act 2.0, as proposed, would raise the age for required minimum distrubtions to 75, in three steps, over the next decade or so. Illustration by Barrons (Dreamstime 6)

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Required minimum distributions have been in the news lately as Congress works to pass the Secure Act 2.0, which would raise the age at which seniors must begin making withdrawals from employer-sponsored retirement plans and individual retirement accounts.  

The first Secure Act, signed into law in December 2019, increased the age at which seniors must take their initial RMD to 72 from 701/2. The new bill would raise the age to 73 next year, to 74 starting in 2030, and to 75 starting in 2033.     

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Retirement

Barron’s brings retirement planning and advice to you in a weekly wrap-up of our articles about preparing for life after work.

To answer your questions about RMDs, Barron’s spoke with Steven Denton, wealth manager at Merit Financial Advisors, and Rob Burnette, chief executive and financial advisor at Outlook Financial Center.

Have a question about saving for retirement or your personal financial situation? Whatever the question, Barron’s Retirement can try to help. Email retirement@barrons.com, and we might look to financial pros for answers.

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Q: My wife turns 72 in October. Does she have to take her initial RMD after her birthday, or can IRA withdrawals made throughout the year be used to meet the RMD?

As long as she’s turning 72 this year, the specific date of her birthday doesn’t matter, so withdrawals made throughout the year count toward her RMD, Burnette said. Since this will be her initial RMD, she has until April 1, 2023, to take it. Subsequent RMDs must be made each year by Dec. 31, so withdrawing her 2022 RMD this year would spare her from having to take two RMDs during 2023. 

Q: I’m still working full time and don’t plan to retire for five more years. Do I still have to take RMDs beginning this year?

If you have an IRA and are turning 72 this year, then you must take an RMD for 2022, Denton said. However, you may be able to delay taking RMDs from your company’s traditional or Roth 401(k) plans until after you’ve retired, depending on the plan, according to IRS Publication 575: “Pension and Annuity Income.”

Some 401(k) plans allow current employees to delay taking an initial RMD until April 1 of the year following the calendar year in which they retire. If you retire this month, for example, your plan may allow you to wait until April 1, 2023, to take your initial RMD. 

Other plans may require workers to take RMDs according to the standard timeline, meaning you must take your initial RMD for the year in which you turn 72, by April 1 of the following year. If you own 5% or more of the company, then you must take RMDs according to this schedule even if you’re still working.

“It’s extremely important to check your 401(k) summary plan description,” Denton said. “Most of the plans that I’ve dealt with will allow you to delay it until you retire, but some plans may require you to start at 72 and not delay it, so it all depends on the company plan.”

Q: I’m working and continue to fund a Roth 401(k). I understand that I must take an RMD, but there will be no tax liability because this is an after-tax account. I didn’t receive an estimated RMD calculation from my job’s 401(k) provider early in 2022. Is my understanding correct?

Since you’re still working, your company’s plan likely doesn’t require you to take an RMD from your Roth 401(k), which probably is why you didn’t receive an RMD calculation from your plan administrator, Burnette said. 

According to IRS Publication 575, you generally must begin taking RMDs from your traditional or Roth 401(k) after turning 72 or retiring. In either case, you have until April 1 of the following year to complete your initial RMD. 

Q: I turned 72 in January and directed my IRA custodian to send $5,000 to a Ukrainian relief organization as a tax-free contribution and a partial RMD. Can I wait to withdraw the remaining RMD amount in early 2023 without incurring any IRS penalties now that I’ve started the RMD ball rolling?

You still have until April 1, 2023, to finish taking your initial RMD, even though your charitable contribution was made this year, Burnette said. Seniors older than 701/2 may make qualified charitable distributions from IRAs totaling up to $100,000 this year. The money goes directly from the IRA to the charity and isn’t taxed, though it does count toward your RMD. 

If you donate to an organization other than a qualifying charity, you’ll likely have to pay taxes on your IRA distribution, Denton said. If you know a charity’s employer identification number, you can use the IRS website to verify that the organization is eligible to receive tax-deductible contributions. 

Q: I turned 72 last month. If I wait until April 1 to take my initial RMD, is the RMD amount based upon the value of the IRA at the end of 2021 or 2022?

Your RMD for 2022 is based on your account balance at the end of 2021, regardless of when you actually take this year’s RMD, Burnette said. That’s one reason it makes sense for seniors to take RMDs early in the year, selling assets before they have a chance to decline in value, as has happened this year. 

The counterargument is that since the stock market generally goes up over time, taking RMDs late in the year gives assets a chance to appreciate. To mitigate the risk of market volatility, some seniors make withdrawals every month or every quarter to satisfy their RMDs over the course of the year.

Write to retirement@barrons.com

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