According to Lagradaonline , When saving for retirement, using a tax-advantaged retirement account is a popular choice among workers, as it allows a larger portion of their salary to go towards savings. Although it might seem counterproductive to think about Required Minimum Distributions (RMDs) when retirement feels far off, it’s important to understand the basics so you can make the best financial decisions. The major benefit of tax-advantaged accounts is the power of compound interest, which grows your savings over time, helping to support you in retirement.
IRAs and 401(k)s are among the most common retirement accounts, but understanding the rules around these accounts is crucial for a smooth transition into retirement.
Don’t Forget to Withdraw
One key rule retirees need to be aware of is the RMD rule. RMDs are mandatory withdrawals that retirees must make from their retirement accounts to pay taxes to the IRS. These withdrawals are a minimum amount that retirees must take out, regardless of whether they need the money. The amount is calculated by dividing the balance of your retirement account at the end of the previous year by your current life expectancy.
RMDs must begin the year you turn 73, although you have an extension until April of the following year to take your first RMD. However, be aware that if you live in a state where retirement income is taxed, you could face a higher tax bill than anticipated. This rule applies to both employer-sponsored retirement accounts like 401(k)s and individual accounts like traditional IRAs and SEPs. If you are still working past age 73 and contributing to an employer-sponsored retirement plan, the RMD can be delayed until you retire.
If you fail to take the required RMDs, the IRS imposes a penalty of 25% of the amount you should have withdrawn, in addition to requiring you to pay the original taxes owed on that amount. If you correct the mistake within two years, the penalty can be reduced to 10%, but it’s always best to be informed and take the necessary withdrawals on time.
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How to Calculate the RMD
The RMD is calculated by dividing your retirement account balance at the end of the previous year by your life expectancy, as determined by IRS tables. While it can be difficult to predict exactly how long you will live, the IRS provides life expectancy tables based on factors like your current age and gender.
Here’s a sample table showing the remaining life expectancy by age according to the IRS:
| Age | Remaining Life Expectancy |
|---|---|
| 73 | 26.5 |
| 74 | 25.5 |
| 75 | 24.6 |
| 76 | 23.7 |
| 77 | 22.9 |
| 78 | 22.0 |
| 79 | 21.1 |
| 80 | 20.2 |
| 81 | 19.4 |
| 82 | 18.5 |
| 83 | 17.7 |
| 84 | 16.8 |
| 85 | 16.0 |
| 86 | 15.2 |
| 87 | 14.4 |
| 88 | 13.7 |
| 89 | 12.9 |
| 90 | 12.2 |
| 91 | 11.5 |
| 92 | 10.8 |
| 93 | 10.1 |
| 94 | 9.5 |
| 95 | 8.9 |
| 96 | 8.4 |
| 97 | 7.8 |
| 98 | 7.3 |
| 99 | 6.8 |
| 100 | 6.4 |
What to Do With the RMD Funds
While RMDs ensure that the government collects taxes, they also ensure retirees have the necessary funds to support themselves. However, if you don’t need the money, you still have to withdraw it. So, what can you do with those funds?
One option is to deposit the money into a high-yield savings account, allowing it to grow further. Another option is to donate the RMD to a qualified charity through a Qualified Charitable Distribution (QCD). A QCD can help you reduce your taxable income and benefit a cause you care about.
Being informed and prepared for RMDs will allow you to make the most of your retirement savings and avoid unnecessary penalties.
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