Key Points
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You get options for taking your first RMD.
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There are ways to reduce the tax hit.
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You may be off the hook if you’re still working.
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The nice thing about saving for retirement in a traditional IRA or 401(k) is that your contributions serve as an immediate tax break. If you’re a higher earner, getting to exclude some income from taxes while funding your retirement savings is a pretty great deal.
But there’s a downside to having your savings in a traditional IRA or 401(k). Once you turn 73 or 75, depending on your year of birth, you’ll be forced to start taking mandatory withdrawals known as required minimum distributions, or RMDs.
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RMDs are due every year by Dec. 31, and failing to take them on time can result in steep penalties. But you may have more options for managing your RMDs than you think. Here are five things you may not have known about RMDs, but should.
1. You can defer your first one
If you were born prior to 1960, your first RMD is due by Dec. 31 of the year you turn 73. Otherwise, it’s due by Dec. 31 of the year you turn 75. You’re allowed, however, to defer your initial RMD to April 1 of the year after. And while that does mean taking two RMDs the following year, in some cases it could make sense.
Let’s say you sold property or other assets and realized a huge gain the year you’re first on the hook for RMDs. Being able to defer your first withdrawal could be advantageous from a tax perspective, so it may be an option worth exercising.
2. They don’t have to be taken in cash
You might assume that if the market is down and your RMD is due, you’ll be forced to sell assets at a loss to satisfy that requirement. But RMDs allow savers to take what are called in-kind distributions. This means you can transfer shares of stocks or ETFs into a taxable brokerage account to fulfill your RMD obligation.
You’ll still owe taxes on your RMD like you would with a cash distribution. But that way, you don’t have to take an automatic loss to satisfy your RMD. You can leave those shares invested in a taxable account so they can recover their value.
3. QCDs can help reduce the tax hit
If you don’t need your RMDs to cover living costs and you’re looking to be charitable, QCDs are an option worth looking into. Short for qualified charitable distributions, QCDs allow you to transfer funds from an IRA to a charity directly.
What this allows you to do is satisfy your RMD without adding to your tax bill. A charity you care about gets your donation, and everyone wins.
The current QCD limit is $111,000. If you’re married and both you and your spouse have to take RMDs, you can do a combined $222,000 in QCDs for the year.
4. You may get more leeway if you’re still working
While RMDs typically kick in at age 73 or 75, there’s an exception if you’re still working. In that situation, you’re exempt from taking RMDs from your current employer’s 401(k) plan, provided you don’t own more than 5% of the company.
However, this exemption applies only to your current employer’s 401(k), not to old ones. It also does not let you off the hook from RMDs if you have a separate IRA.
5. Correcting a missed RMD quickly generally reduces the penalty
If you don’t take an RMD by the Dec. 31 deadline, you’ll typically be subject to a 25% penalty on the sum you fail to remove. But remedying that mistake quickly could save you money.
The IRS will typically reduce your penalty to just 10% if you take your missed RMD within two years. There may also be situations where the IRS is willing to waive your penalty entirely, so it’s worth consulting with a tax professional if you accidentally miss the deadline.
If you enter retirement with savings in a traditional retirement account, RMDs may become a part of life. Knowing the rules could make them easier to work into your financial plans.
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