U.S. Markets closed
  • S&P Futures

    3,231.00
    -0.25 (-0.01%)
     
  • Dow Futures

    26,689.00
    +4.00 (+0.01%)
     
  • Nasdaq Futures

    10,812.00
    -17.00 (-0.16%)
     
  • Russell 2000 Futures

    1,451.60
    +4.90 (+0.34%)
     
  • Crude Oil

    39.47
    -0.46 (-1.15%)
     
  • Gold

    1,863.40
    -5.00 (-0.27%)
     
  • Silver

    22.36
    -0.74 (-3.22%)
     
  • EUR/USD

    1.1665
    +0.0003 (+0.0233%)
     
  • 10-Yr Bond

    0.6760
    +0.0120 (+1.81%)
     
  • Vix

    28.58
    +1.72 (+6.40%)
     
  • GBP/USD

    1.2719
    -0.0007 (-0.0534%)
     
  • BTC-USD

    10,321.13
    +71.66 (+0.70%)
     
  • CMC Crypto 200

    217.46
    +3.50 (+1.63%)
     
  • FTSE 100

    5,899.26
    +69.80 (+1.20%)
     
  • Nikkei 225

    23,214.49
    -132.00 (-0.57%)
     

3 Investing Facts About Required Minimum Distributions You Need to Know - August 12, 2020

Zacks Equity Research

Neglecting to withdraw a required minimum distribution (RMD) from an IRA by the due date brings about a painful tax code penalty: 50%. Yes, you read that right. If you are supposed to withdraw at least $4,000 and (uh oh!) did not do as such, you have to write the IRS a check for $2,000. Keep in mind that on January 1, 2020, the RMD rules were modified.

Like many investors, you're likely aiming to build a comfortable nest egg to ensure a comfortable retirement. Among retirement financial planners, this is called the "accumulation phase." In this phase, your goal is to invest wisely by choosing stocks with long-term potential for your retirement portfolio, such as Lockheed Martin (LMT), a current top ranked dividend stock.

But that's just half of retirement planning. The second part, the "distribution phase," sometimes gets overlooked even though it can be more fun to think about. That's because the distribution phase is where you determine how to spend your hard-earned assets.

Making plans for the distribution stage involves deciding where you'll live in retirement, whether you'll travel, your proposed leisure activities, and more decisions that will affect your spending during your golden years.

In addition to these considerations, it is essential to take into account the RMD that applies to most retirement accounts. Basically, this is an IRS requirement that you withdraw a certain amount from your qualified retirement accounts once you reach age 72.

Why does the IRS require you to start taking your money out? It's simple - they want to make sure they get their tax. If this rule didn't exist, people could live off other income and never pay tax on their retirement investment gains. Then, that money could be left to family or friends as an inheritance without the IRS collecting any taxes from you.

Key Facts to Know About RMDs

Which types of retirement accounts have RMDs? Qualified retirement accounts like IRA accounts, 401(k)s, 457 plans and other tax-deferred retirement savings plans like a TSP, 403(b), TSA, SEP, or SIMPLE IRA plan require withdrawals in retirement.

When does it become necessary to begin taking distributions? Your first distribution must be taken by April 1 of the year following the calendar year that you turn 72 (for most accounts). Also, if you retire after that age, you must take your first RMD from your 401(k), profit-sharing, 403(b), or other defined contribution plan by April 1 of the year after the calendar year in which you retire.

For each year after your required starting date, you must take your RMD by December 31. Note that you don't need to take an RMD on a Roth IRA since you covered taxes before contributing. Other varieties of Roth accounts require RMDs. But, there are approaches to avoid them - for instance, you can roll your Roth 401(k) into your Roth IRA.

What happens if don't take my RMD? The penalty for not taking a required minimum distribution, or if the distribution is not large enough, is a 50% tax on the amount not withdrawn in time.

How much cash do I need to withdraw? The RMD you are required to take is calculated by dividing your previous year's December 31st retirement account balance by a "distribution period" factor dependent on your age.

Here's an example to give you an idea of the math: Ann is 71 and will take her first RMD in the year following the year she turns 72. Her IRA balance toward the end of the preceding year was $100,000. Her "distribution period" factor is 27.4. Dividing $100,000 by 27.4 equals $3,649.63. This is the amount Ann is required to withdraw for her first RMD.

Learning about the "distribution phase" is just one aspect of preparing for your nest egg years.

To learn more about the tax implications of retirement spending - and much more about retirement planning - download our free guide: Retirement Made Easy.


You'll find useful, detailed steps to help you navigate both the accumulation and distribution phases of retirement planning. Get Your FREE Guide Now
 
Lockheed Martin Corporation (LMT) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research