Understanding RMDs: key takeaways for retirees

Richard Warner and co-host Doug Turnbull recently discussed Required Minimum Distributions (RMDs) on their segment “The Retirement Bullpen.” Warner explained that RMDs are a tax law that applies to all pre-tax retirement accounts such as traditional IRAs and 401(k)s. The rule requires that a minimum amount of money be withdrawn from these accounts each year once you reach a certain age, currently set at 73 years old. Warner emphasized the importance of retirees understanding that they must withdraw from certain retirement accounts and that taxes must be paid on these distributions. He also shared that RMDs are calculated based on the value of your portfolio and your age as of December 31 of the previous year. The IRS publishes a life expectancy factor annually, which you use to divide your portfolio’s value to determine your RMD for the year. For example, if on December 31 your 401(k) was worth $1 million and you were 75 years old with a life expectancy factor of 24.6, your required minimum distribution would be $1 million divided by 24.6, equating to $40,650. Warner cautioned that the IRS imposes significant tax penalties for not taking the full RMD.

Understanding RMD penalties and calculations

The penalty is 25% of the amount not withdrawn, which can be reduced to 10% if you correct the error promptly. Even if your portfolio value decreases significantly within a year, you cannot adjust your RMD for that year. The RMD is fixed based on the previous year’s value. However, you can affect the RMD for the following year by managing your withdrawals and portfolio value before December 31. Warner advised keeping an emergency fund in a liquid account to handle unexpected expenses, consulting a financial advisor for a comprehensive retirement plan, and monitoring and adjusting your withdrawals and investments to optimize your tax situation. In addition to financial advisories, the Warner Financial team is hosting dinner seminars on taxes and Social Security. These events will take place on February 25th and 27th in Omaha, Nebraska. For more information or to book a complimentary appointment, interested individuals can contact Warner Financial.