If you are 72 or older, you may have decisions to make about the money you take from retirement accounts, such as your IRA and 401(k) – and you may need to be particularly careful this year.
Here’s some background: Once you turn 72, you generally must begin taking withdrawals – called required minimum distributions, or RMDs – from your traditional IRA, 401(k) or similar employer-sponsored retirement plan. (Roth IRAs are not subject to RMDs during the account owner’s lifetime.) Last year, as part of the pandemic-related Coronavirus Aid, Relief and Economic Security (CARES) Act, the RMD rule was suspended, but RMDs resumed for the 2021 tax year.
Even so, determining when you must take your RMD is complicated by the fact that last year’s suspension followed 2019 legislation that bumped the RMD starting at age from 70½ to 72. So, if your birthdate is between July 1 and Dec. 31, 1949, you have until April 1, 2022, to take your first RMD. Anyone born before July 1, 1949, must take their RMD by Dec. 31, 2021. (If you have an inherited IRA, you may also need to take an RMD by the end of 2021.) If you haven’t begun taking RMDs, consult with your financial or tax advisor. If you don’t take the RMDs when you should, and in the right amount, you will be subject to a 50% penalty tax from the IRS on the amount not taken.
Speaking of taxes, be aware that your RMDs will be added to your taxable income, but you may be able to do something to affect your tax situation if you don’t need this money to meet your retirement needs. If you are 70½ or older, you may be able to move up to $100,000 per year from a traditional (or Roth) IRA – including your RMDs – directly to a qualified charitable organization. This move, called a qualified charitable distribution, generally allows you to exclude RMDs from your taxable income if the amount of the charitable contribution is at least as large as the amount of your RMD. Consult with your tax advisor before taking this step to ensure your distribution qualifies.
If you need the money to help support your retirement lifestyle, taxes will likely be less of a concern when you take RMDs. That leads to other questions: What if you need to take out more than the RMD from your IRA and 401(k)? And just how much can you afford to withdraw each year without running the risk of outliving your resources?
You can answer these questions by developing a suitable withdrawal rate for your retirement accounts – that is, an amount you can afford to take out each year that supports your cost of living and won’t threaten your long-term financial viability. Typically, a 4% annual withdrawal rate – including whatever you must take out for RMDs – is a good starting point, but everyone’s situation is different. To arrive at a withdrawal rate that’s right for you, you will need to consider several factors, such as your age, family history of longevity, spending flexibility, and the degree to which you rely on your investment portfolio to meet your spending needs. A financial professional can help you arrive at an appropriate withdrawal rate for your specific situation.
Developing a solid strategy for your RMDs and retirement accounts can help improve your prospects of enjoying the retirement lifestyle you’ve envisioned.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
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Edward Jones, its employees, and financial advisors are cannot provide tax advice. You should consult your qualified tax advisor regarding your situation.
Sean Payne, CFP® can be reached at (562) 596-3722.