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Required Minimum Distribution: You’re 72… Now What? [Video]

by Steve Smalenberger / May 17, 2021


Now that you’ve been saving in your retirement account for years, there comes a time where you have to start taking that money out.  The government calls that a Required Minimum Distribution (RMD).  Let’s walk through some of the mechanics of that so you feel knowledgeable and educated about it. 

UPDATE: This article has been updated to reflect the new age to take a Required Minimum Distribution starting at age 72 instead of 70 1/2.  If you were required to start taking distributions at age 70 1/2 you still need to continue those.  But if you had not yet reached that age your new beginning date is age 72.

Required Minimum Distribution

What is this?  It is a mandatory withdrawal from certain accounts.

What accounts are impacted?  This impacts your pre-tax accounts also knows as tax-deferred accounts.  Examples of these are your Traditional IRA, 401(k), 403(b), etc.  We will be looking at an IRA for example.  When you put the money in the government gave you an incentive that allowed you to reduce your taxable income to get a deduction on your tax return.  Now they are waiting for that tax revenue.  

Why is this required?  The IRS provides incentive to save for retirement by deferring the income tax on money you put in these accounts, but they also want to collect tax revenue at some point. 

When does it start?  At a certain age this has to start.  There are two rules here; in the past it was age 70 1/2,  for those who had not reached 70 1/2 yet its a new rule of age 72.  Let’s walk through this in a chart so it is easy to understand. 

In a calendar year let’s use the example that someone turns 72 in September noted here by RBD (Required Beginning Date).  They turn 72 here they have an option for their very first distribution.  They can decide if they take it in that year or they wait until April 1st of the following year.  This is only on your very first distribution.  Every year thereafter it has to happen in the calendar year.  You can take it monthly you can take it once, so I am just showing it here at the end of the year.  Year two you take it by 12/31, year three you take it by 12/31, every year thereafter it has to happen by the end of the year.  That’s called satisfying your RMD requirement.  

So the money comes out and it is now taxable.  You have been saving in your retirement account for years but now you have to start taking that money out.  The government calls this your required minimum distribution or RMD for short.   

Timeline of a Required Minimum Distribution

Let’s look at a timeline here so you understand when that has to take place and what you have to do.  In the year you turn 72 for example lets say September or October this individual turns 72.  They are required to take the money out.  On their very first distribution they can decide if they take that money out by the end of that year or if they wait till the grace period of 4/1 of the following year.  You have two options.  Every year thereafter it has to come out by the end of the year.  You can take it monthly or quarterly as long as you satisfy it, meaning you withdraw the money by the end of the year.  Then you’ve met your RMD requirement.  

When does it make sense to start?

Looking at your first year it really depends on what you have going on.  It depends if you are still working and earning income.  This will affect whether you take it that year or the next.  It may make sense to take it right now.  However it may make sense to wait until that second year.  Then you are going to have two distributions at the same time so there may be too much taxable income.  

We love laying out a plan, a strategy to help you decide which option makes the most sense to you.  So if you need help please reach out we would love to help you. 

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Steve Smalenberger

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.