What You Need To Know About Your Required Distributions Episode 76

Do You Have An IRA or 401k?
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We always get questions about Required Minimum Distributions (RMDs) especially as we get close to the end of the year. So, let’s take a look at what you need to know.
Please remember, before making any tax decisions, it may be appropriate to speak with a qualified tax preparer about your situation.
So, what is an RMD?
We make a deal with the government when we begin saving money in tax-deferred accounts like an IRA, 401k or 403b.
We agree that we won’t take our money out until we are at least 59.5 years old, and as a result, the IRS allows us to defer paying the taxes we owe on this money.
This helps us by lowering our taxes while we are working, but the IRS eventually wants their money. There is no legal way to avoid RMDs.
We’re reminiscing about warm salty breezes from our beach trip to Destin, FL, earlier this year. The pictures this week are from our trip.
Amelia riding a duck
If you’re already taking money out of your tax-deferred accounts, you may already be satisfying your distribution requirement. However, it’s strongly advised to ask your tax advisor if you’ve met your requirement.
The IRS is serious about taking out the right amounts! If you fail to take the required amount, the IRS will penalize you by taking 50% of what you should have taken.
How do RMDs work?
After you reach the age of 70.5, for some people 72, you must begin taking money out of qualified retirement accounts. A law changed in early 2020 to make it 72 for everyone going forward. However, if you turned 70.5 in 2019 or before you fall under the old rule, and you should be taking RMDs each year.
The amount that you take out begins around 3.5% to 4% and it increases each year you live. Simply put, the IRS wants the opportunity to tax your money that has never been taxed.
Amelia playing in a puddle
If you have more than one qualified retirement account, you can satisfy the RMD from one account or you can split it up. You may take the required distribution from each qualified account.
The amount that you are to take is based on your account’s value on December 31st of the prior year. So, your 2022 RMD percentage to take out will be based on your account’s balance as of December 31st, the prior year and your age. Each year the custodian where your money is held will report to the IRS your account balance, and you should receive a notice telling you what you need to take out.
Generally, you must begin taking your RMD by the next April 1st after turning 72. So, if you turned 72 in 2021, you must begin taking your distribution by April 1, 2022.
A question I often get is, I don’t need the money. What do I do with it now? After you take your distribution and you pay taxes on the money, you may reinvest it in any type of investment. This type of money that has already been taxed is commonly referred to as a non-qualified money. Meaning the principle has been taxed and only the gains are taxable. This is sometimes called a “taxable” account also.
If you invest non-qualified money in a brokerage account to buy equities, you’ll get a statement each year from the brokerage company telling you to pay taxes on the gains you’ve made.
Not that CDs are attractive right now, but if you placed your money in a CD the same would apply. The only type of investment that allows you to defer paying taxes on non-qualified money is an annuity. The gains on an annuity are only taxed when you take money out and are not taxed yearly like other accounts.
There is one other type of account that the gains are completely tax-free if done properly. More on that below.
What happens to your qualified accounts when you pass away?
When someone other than your spouse inherits a qualified money, they will have to take all the money out and pay taxes on it within ten years of your death. Your beneficiary can do the following:
  • Take a little money out each year.
  •  They can take it all out at the beginning or end.
  • The rule is that the money has to be in a taxable account within ten years of the original person’s death.
Lizard on a wall
Is there anything you can proactively do to save on taxes?
Most tax professionals will try to help you lower you taxes now. In order to do that they often recommend deferring taxes when you can.
In 2018 most everyone’s taxes went down. As it stands right now, we will all be paying more in taxes in 2026 when the law sunsets.
It may be advisable, even if you don’t need the money now, to begin a strategy to take your money out now over the next few years. Pay taxes on it now at today’s rates. Otherwise, you may be paying higher taxes if you wait until 2026 to take money out of our qualified accounts..
You may qualify to deposit your non-qualified money in a tax-free plan that you or your beneficiaries will never have to pay taxes on again.
The best window of opportunity to seize upon this is when you are between the ages of 60 and 65. If this is something you may be interested in, I’d be happy to schedule a 15-minute call with you to determine if this may be appropriate for you.
To see if you qualify for this tax-free account, please call our office at 864.641.7955.
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