The Required Minimum Distribution – 2024 version
Here are some key takeaways:
– RMDs are calculated based on the account balance on December 31st of the previous year and an IRS life expectancy table.
– The RMD amount changes yearly due to changes in account balance, and life expectancy factors.
– RMDs from IRAs can be batched and taken from one account, but 401(k) RMDs must be taken separately.
– Taking distributions before the required age can lower future RMDs and help manage tax liability.
– RMD money doesn’t have to be spent; it can be reinvested in a non-retirement account.
– Having multiple income “buckets” in retirement provides more financial options.
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The Required Minimum Distribution – 2024 version – Transcript
We’re getting to the end of 2024 here. So if you haven’t done the required minimum distribution yet, you should be planning on taking it in the next couple of weeks. You don’t want to wait until the last minute in case something goes wrong with processing.
If you have not started taking your RMDs (the required minimum distribution) before 2024, your starting age will now be seventy three. It used to be age seventy and a half or you could defer it a little bit until April first of the year after you turn seventy and a half. Then they kicked it out with the first version of the Secure Act to age seventy two.
Now it’s age seventy three with Secure 2.0 Act. There’s a lot of unknown and there seems to be a lot of mystery about it. I can say that for a fact because it’s probably our most watched video on our YouTube channel in the last year.
People want to know and have questions about the required minimum distribution. Like you said, they have changed a lot over the years. I think in about another five years it’s going to be pushed out even further to age seventy-five.
The thing that I try and drive home when we’re talking about this is listen to what the title is: It’s the required minimum distribution. When you’re taking money out of a retirement account, this is money that has not been taxed. You will have to show this as taxable income just as if you earned it on the job.
You have to prepare to have taxes withheld. Your 401k provider or the bank or brokerage where you have your IRA can do the tax withholding for you, usually federal and state. You want to make sure that you’re not leaving this to chance or leaving it all until the end where you’ll have to settle up and pay a big tax bill the following year.
We’re not taking it all and be penalized for that. I think it’s twenty five percent of the required minimum distribution. It used to be fifty percent. It’s important you don’t want to put yourself in a situation where you’re penalized taking money out of something like a 401k or an IRA.
It is something that you have to contend with from an income perspective. From a tax perspective in retirement, you want to manage around that date and do everything you can to not be surprised when it comes for tax time.
Just a high level of how to calculate it: It’s based on the value of the account on December thirty first the year before. You actually have to go back to last year every year. What was the balance at on 12/31 of the year before? That is the number that’s used to calculate the required minimum distribution.
The math behind it is based on a life expectancy table straight from the IRS. It assigns a factor to each age. It breaks it down: If you’re seventy two you divide your account balance by x, seventy three it changes each year. So the account balance is going to change and the factor that you’re dividing the account balance by is going to change every year.
People ask us all the time, “Okay, so I’m going to be taking $14,000 a year from my IRA?” No. That number is going to change every single year for two factors. The first is the life expectancy table: as you get older you have a shorter life expectancy. You actually have to take out a bigger percentage each year.
The other factor is: if we have a good year in the market last year, you’re going to be taking out more next year in the required minimum distribution because it’s based on the balance on 12/31 of last year. If we have a year like 2022 where markets were down a lot, you may have a smaller required minimum distribution the next year.
If all of your retirement money is sitting in IRA accounts, then you can batch it together and take it from one account. If you have a 401k account, you’re going to have to do the required minimum distribution from your 401k.
For example, if you’ve got three different IRAs and a 401k with an old employer, you can batch those three IRAs and take it out of one account or take an equal amount out of all three. You still have to take the required minimum distribution from your 401k.
They pull all of the balances together to calculate how much needs to come out on an annual basis. But with a 401k, there has to be a distribution each year. You can’t skip that.
Be sure to get that done before the end of the year. You can have taxes withheld right from there when you do the distribution. We do have clients that, when they’re taking their distribution, instead of getting a check or a direct deposit at their bank, they just move it over to their investment account.
We continue to invest the money for them if they’re not in a pinch. You don’t have to spend the money, you just have to pay tax on it because it all went in pre-tax into those retirement accounts and grew tax-deferred.
We talk about how there’s nothing wrong with taking money from your retirement accounts at sixty-seven, sixty-eight, sixty-nine. In fact, that’s going to lower your overall base on your retirement account so you’ll have less of the required minimum distribution to take out in the future.
It might make sense for you to pull money from these tax-deferred accounts and front run some of that tax liability when you are required to take the money out. It’s all about knowing your different buckets of income. The more buckets of income you have, the more options you give yourself.
We didn’t even talk about inherited IRAs. We could spend another fifteen minutes talking about that, so that’ll be another episode. We do think we have some pretty good YouTube videos out on inherited IRAs, so we will be sure to link those up in this video.
