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How to Avoid Mistakes With Required Minimum Distributions From Your Retirement Accounts

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  • Unless this is your first year of required minimum distributions, you need to take those RMDs by the end of the year.
  • There are different rules that apply to different accounts, which are important to know.
  • Here are the basics and some tips to avoid making mistakes with your RMDs.

You've got about a month left to make sure you get it right when it comes to mandatory withdrawals from retirement accounts.

Required minimum distributions, or RMDs as they're called, are annual amounts that must be withdrawn beginning in the year you reach age 72 — up from age 70½ before the Secure Act took effect in 2020. RMDs apply to 401(k) plans — both traditional and Roth — and similar workplace plans, as well as most individual retirement accounts. Roth IRAs have no required withdrawals until after the account owner's death.

While most retirees withdraw more than they're required to — i.e., they need the income — others need to be sure they're calculating their RMDs accurately and following the different rules that apply. Getting it wrong could mean facing a 50% tax penalty on the amount that should have been withdrawn but was not.

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Be aware that while the stock market is down this year, your RMDs are based on each qualifying account's balance on Dec. 31 of the previous year. So for your 2022 RMDs, that means the year-end 2021 balance.

"A lot of people have taken a beating [in the stock market] this year, and so the question is, 'Do I get a break because my balance has gone down so much?' And the answer is no," said Ed Slott, CPA and founder of Ed Slott and Co.

As of Tuesday's market close, the S&P 500 Index is down 17.5% from Dec. 31. The Dow Jones Industrial Average has shed roughly 7.5%, and the tech-heavy Nasdaq Composite index is 30.6% lower.

Here's how your RMDs are calculated

The amount you must withdraw each year is generally determined by dividing each qualifying account's Dec. 31 balance by a "life expectancy factor" as defined by the IRS.

For example, if you turned, or will turn, age 72 this year, that number would be 27.4, according to the new life expectancy tables from the IRS that took effect Jan. 1. Divide your account balance — say it's $100,000 — by that factor and your 2022 RMD for that account would be about $3,650. So if the balance is $500,000, your RMD would be five times that, or roughly $18,250.

The new IRS tables reflect longer life expectancies, which means annual RMDs are generally lower — as a percentage of your balance — than they would be if the pre-2022 tables were used.

Different rules apply to different types of accounts

Be aware that if you have multiple accounts subject to RMDs, you may have options.

For IRAs, you can tally up the total of each RMD and take that amount from just one of your IRAs, or any combination you want. This aggregation applies to traditional IRAs, as well as SEP and SIMPLE IRAs.

"For all IRAs, you can add all the RMDs up, and then you can take that aggregate amount from any one IRA or combination of those IRAs," Slott said.

"I tell people to get rid of smaller accounts — I say let's empty the smaller ones," he said. "Having too many accounts means it's more likely you'll miss an RMD from one of the accounts or miss it in your calculation."

Note that inherited IRAs are not included in that aggregation rule. Unless you have multiple IRAs that you inherited from the same decedent, you must take RMDs from each inherited IRA, Slott said.

For 401(k) accounts, RMDs must come from each account that is subject to the withdrawals. However, you can aggregate 403(b) accounts, Slott said.

Avoid 'bunching' income in first year of RMDs

If you celebrated your 72nd birthday this year, or will in December, be aware that while the law allows you to delay your first RMD until as late as April 1 of next year, doing so would mean taking two RMDs in 2023 — which could have tax consequences.

"They'd be 'bunching' income in 2023," Slott said. "The better option for most people is to take the first RMD in 2022 and the second in 2023, in two separate tax years, and in most cases that will lower their taxes in each year."

Additionally, if you're working and contributing to a retirement plan sponsored by your employer and you don't own more than 5% of the company, RMDs do not apply to that particular account until you retire.

Spouses cannot combine their RMDs

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Married couples must view their accounts and RMDs separately from each other. In other words, while each person can aggregate the RMD amount among their own accounts as permitted, they cannot combine those amounts with their partner's and then take RMDs from just one spouse's account.

Also, while you can delay RMDs from a 401(k) if you're working for the company sponsoring it, you still must take those distributions from other 401(k) accounts you have, as well as any other qualifying accounts.

You can take RMDs 'in kind' if you need to use stock

Having enough liquidity in your retirement account — i.e., cash — to satisfy your RMD is the ideal scenario, Slott said. However, if you need to lean on your stock holdings, RMDs can be taken "in kind," he said.

This essentially involves transferring particular stock from your tax-advantaged IRA to a taxable investment account, such as a brokerage account. While you'd pay taxes on the amount transferred, you would have taken your RMD and yet still own the stock.

"You're holding the same thing but you've satisfied your RMD," Slott said.

A 'qualified charitable distribution' can be used

If you are charitably inclined, you can use a "qualified charitable distribution" of up to $100,000 to satisfy your RMD. This involves transferring money directly from your account to a qualified charity, and the amount is excluded from your taxable income.

For inherited IRAs, 401(k) plans or other qualified retirement accounts, the balance must be entirely withdrawn within 10 years if the owner died after 2019, unless the beneficiary is the spouse or other eligible individual.

The 2019 Secure Act eliminated the ability of many beneficiaries to stretch out distributions across their own lifetime if the original account owner died on Jan. 1, 2020, or later.

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