A Reminder About RMDs

Monday, September 30 at 02:15 PM
Category: Personal Finance

If you’re like a lot of IRA and 401(k) owners over 70 years of age, this might be the time of year to start thinking about that Required Minimum Distribution.

RMDs are the amount participants must start taking from their retirement accounts by April 1 in the year after they reach age 70 ½. Subsequent RMDs must be taken each year by Dec. 31. The amount that has to be taken is derived by “dividing the prior year-end fair market value of the retirement account by the applicable distribution period or life expectancy,” according to Investopedia.

It’s no secret a lot of account owners don’t actually want to take out the money, and a quick history lesson helps explain why. An article that appeared in the Houston Chronicle earlier this year revealed in 1985, a portfolio built on a 50-50 mix of stocks and bonds yielded 7.19 percent, which is almost twice the amount of a person’s first RMD.

An account owner in 1985, therefore, could take the RMD and still have the ability to grow his or her account simply by reinvesting the excess income. Furthermore, the minimum distribution didn’t exceed the portfolio dividend and interest income until an account owner was 87 years old, which was older than the typical life expectancy.

Yields began to decrease in 1986, though, and scenarios like the one described above seem long-gone. In every year since 1998, the Chronicle reported, a 50-50 stocks-and-bonds portfolio had provided a yield lower than the 3.65 percent RMD enforced at age 70 ½.

That means many account owners are forced to distribute principal in addition to interest and any dividends. Those kinds of annual reductions in principal often spark predictable anxiety.

There are ways, though, to ease the sting of RMDs. Perhaps the most prudent move would be to visit with your financial advisor to explore ways to leverage the distribution into an investment that meets a specific goal.

In the meantime, here are some other tips to consider:

  • Don’t get a late start. As mentioned, your first RMD has to be taken by April 1 of the year after you reach 70 ½. Subsequent RMDs are due by Dec. 31 each year. The penalty for not doing so is a whopping 50 percent tax that’s in addition to regular income tax on the RMD.
  • Don’t double-dip. If you wait until April 1 to take your first RMD, you’ll have to take your second by Dec. 31. Because the withdrawals are taxed as income, taking two RMDs in the same year could result in a significant increase in your income tax bill.
  • Don’t bring your 401(k) into play. Anyone still working after age 70 ½ can delay the minimum distribution from the 401(k) at his or her current employer – but not an old plan at a previous employer – until retirement.
  • Don’t raid your top-performing account. People with multiple IRAs must calculate the RMD for each one, but do not have to take a withdrawal from each one. Instead, it’s allowable to add up your RMDs and take it from one account – or a combination of accounts. If you have three accounts paying 2, 4 and 6 percent, for example, it’s typically advisable to take the RMD from the account paying the least amount.

Investment products and services are provided by Arvest Investments, Inc., doing business as Arvest Asset Management, member FINRA/SIPC, an SEC registered investment adviser and a subsidiary of Arvest Bank. Insurance products are made available through Arvest Insurance, Inc., which is registered as an insurance agency.  Insurance products are marketed through Arvest Insurance, Inc., but are underwritten by insurance companies. Trust services provided by Arvest Bank.

 

Tags: Financial Education
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