We’ve talked about RMDs and learned about what they are and when they start. In this video let’s look at how it is calculated, taxed, received, and how you spend it. First, an RMD (Required Minimum Distribution) comes from accounts like 401(k)s and IRAs. It is mandatory and starts in the year you turn 72. So in this year that you have to take your first distribution, how do you calculate it?
How to calculate an RMD?
This calculation is really simple, the custodian where the account is held will also help you, but it’s good to know for your own knowledge.
We are using an IRA as an example. So at the end of last year the 12/31 balance was $100,000. You just turned 72 and you look at the life expectancy table that the IRS provides. They give you a denominator and you simply divide it. The factor changes and the amount grows each year, so it is important to refer to the table. Take the $100,000 (last year’s value) divided by your life expectancy factor. This dollar amount is the gross distribution, or how much you have to take out of your account. You can take more, but you can’t take less in order to satisfy the RMD.
How is it taxed?
Since money is being withdrawn from a tax-deferred account, it is a taxable event. Do you want to have tax payments withheld along the way? You could have a percentage withheld for Federal and/or State taxes. For example: 15% for federal taxes is being held back as a payment to the IRS on your behalf. Here in Illinois currently there is no tax on any type of retirement income (pensions, social security, IRAs, 401ks). So we do not need to withhold anything for the state.
How to receive your RMD?
You can receive it in the form of a check, as an ACH transfer to a bank account, or by moving assets. For instance, you could move assets from an IRA to an individual, joint or even your trust account which is changing the location of selected investments from a tax-deferred account to a taxable account.
What do you do with your RMD amount?
Finally, you’ve received this money, the net amount. What are your options?
- Spend it- living expenses, lifestyle
- Save it- in a savings account or checking account
- Reinvest it- you could buy new stocks, mutual funds, or ETFs
- Give it away- to a child or family member
- Donate it- to a charity with your cash or you do a QCD (qualified charitable distribution) which we have another video on that topic it goes directly to the not-for-profit.
- Leverage it- maybe pay a life insurance premium
We’ve just reviewed when an RMD starts, how it’s calculated, how it’s treated, and the six options for how to spend it. We know this is a lot of information and it is meant to be a summary. So if we can help walk you through some of these decisions let us know. We are happy to help!
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Steve enjoys getting to know clients and hear their unique stories and the lessons learned which has brought them where they are today. One of the reasons he enjoys what he does is the ability to show the outcome that can be achieved with different choices. He also enjoys continually learning.