The idea of saving for retirement is drilled into our heads. 401(k)s or IRAs are where we stock away funds as we prepare for the day we say goodbye to the workforce. But did you know, the government actually requires you to take money out of those accounts once you reach retirement? It’s called the Required Minimum Distribution (RMD) rule.

Surprised to hear this? Keep reading to learn what you should know about RMDs well before you reach retirement age.

One year hiatus: not anymore. In 2020 the required minimum distribution rules were suspended. They have been reactivated in 2021. This will catch many by surprise, so remind any loved ones over the age of 72to make their distribution calculation.

Penalties. Don’t withdraw the required amount of money? The IRS can assess a penalty equal to 50 percent of the amount that should have ben withdrawn in addition to the regular tax due. The rules require you to withdraw a certain amount of money revery year from tax-deferred r3etirement plans like 401(k)s sand traditional IRAs after you reach the age of 72 (regardless of whether you want to).

Plan in advance. Don’t wait until you’re 72 to start thinking about required distributions. You can start withdrawing funds from retirement accounts without penalty after you reach 59½. If you start planning a tax-efficient withdrawal strategy before the required distribution rules kick in, you can manage what tax rate will be applied to your retirement distributions.

How much do I have to withdraw? What you’re required to withdraw is based partially on the average life expectancy of someone your age. Utilizing your prior year retirement account balance in conjunction with the calculation based upon the IRS’s life expectancy tables, a required withdrawal amount is determined. The financial institution handling your retirement account will usually do the calculation for you.

What if I am not retired yet? If you reach 72 and are still working for an employer with a provided 401(k), you usually do NOT have to take a distribution from that account as long as you don’t own 5 percent or more of the company. You do, however, have to take funds from other plans where you have assets.

Do all accounts require distributions? Not all. Roth IRA accounts do not have the minimum distribution requirement, while allowing you extra flexibility to manage your other taxable withdrawals during retirement.

Required Minimum Distribution (RMD) rules can be complex and confusing. Tax planning is an important piece of a retirement strategy. At RMS Accounting we are here year round to help you in your tax planning – we’re only a phone call away.