Required Minimum Distributions (RMD)
Once you reach the age of 70 ½, the IRS requires that you start taking money out of your retirement accounts. These mandatory withdrawals are called required minimum distributions or RMDs. Basically, the IRS wants you to start paying taxes on the funds you have saved in your retirement accounts while you are still around.
You must take an RMD for Individual Retirement Accounts (IRAs) and Employer Sponsored Plans such as 401(k)s and 403(b)s. You do not need to take RMDs for a Roth IRA unless it is an inherited one.
There are 3 basic steps to taking your RMD:
Understand the timing – Your first RMD must be taken no later than April 1 of the year following the calendar year you turned 70 ½. Subsequent RMDs must be taken by December 31st of each year.
Calculate the amount – The RMD amount is based on the market value of your accounts as of December 31 of the previous year. The two factors used to calculate the amount are your age and life expectancy. If your spouse is more than 10 years younger than you and is your sole beneficiary, you can use the joint life expectancy method. Call us and we can help you calculate your RMD amount.
Choose how to get your distribution – You can receive your distribution as a lump sum or set up recurring RMDs that flow into a non-retirement account.
Make sure you withdraw enough as the IRS may impose a 50% penalty on any shortfall. The RMD is taxed as ordinary income at your personal federal income tax rate. State taxes may also apply.
What should you do with the money?
Use your RMD for living expenses – receive a check or set up direct deposit.
Reinvest your RMD – If you don’t need the RMD to live on, you can reinvest the funds and keep it working for you.
Rebalance your portfolio – Use your RMD to rebalance your asset weights.
Contribute to a college savings plan – Use the RMD to fund a 529 college savings account for your children, grandchildren, or other beneficiaries.
Give it to charity– Use your RMD to help others and the withdrawal will not be taxable http://retiremeasap.com/benefits-of-donating-your-required-minimum-distribution-to-charity/