If you've reached the age where required minimum distributions (RMDs) are on your radar, congratulations, you've done a great job building your retirement savings. But now comes the part that catches many people off guard: the IRS requires you to start withdrawing from those accounts, whether you need the money or not.
And missing those withdrawals? It can cost you. According to research highlighted by Money.com citing Vanguard data, an estimated 585,000 IRA holders miss their RMD each year, paying an average tax penalty of more than $1,100. In total, missed RMDs cost retirees an estimated $1.7 billion annually. The good news? With the right guidance, this is entirely avoidable.
Here's a plain-English overview of how RMDs work and what to keep in mind as you navigate them.
Not All Accounts Play by the Same Rules
One of the most common points of confusion is that different account types have different RMD rules and they can't always be combined.
- IRAs and 403(b)s: You can add up the total RMD amount across accounts of the same type and take the full amount from one account. However, you cannot satisfy an IRA RMD with a 403(b) withdrawal, or vice versa. (IRS source)
- 401(k)s and 457(b)s: Each account must be withdrawn from separately. You can't consolidate these the way you can with IRAs. (IRS source)
You're the One Responsible
As the account owner, the responsibility for taking your RMD correctly and on time falls on you, not your financial institution. That means knowing which of your accounts are subject to RMDs, when your first distribution is due, and which IRS forms or worksheets apply to your situation.
Your plan custodian or administrator may calculate the RMD amount for you, but verification is still your responsibility. The calculation is based on your prior December 31 account balance divided by a life expectancy factor from IRS tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
Life Expectancy Tables: Which One Applies to You?
The IRS uses three different life expectancy tables, and the one which applies to you depends on your personal situation:
- Joint and Last Survivor Table: Used if your sole beneficiary is your spouse, and they are more than 10 years younger than you.
- Uniform Lifetime Table: The most common table, used when your spouse is not the sole beneficiary, or is not more than 10 years younger than you.
- Single Life Expectancy Table: Used if you've inherited a retirement account (an inherited IRA).
If this sounds complex, that's because it is, but it doesn't have to feel that way with the right support on your side.
We're Here to Help
At Pereira Wealth Management, we work with clients to take the guesswork out of RMDs. Whether you're approaching the age when distributions begin or you've been navigating them for years, there are strategies that may help reduce your tax burden and simplify the process.
If you'd like to learn more about ways to reduce or eliminate the burden of calculating RMDs yourself, we'd love to connect. Reach out to our office to discuss your options. We’re always happy to help.
Source: "Millions of Retirees Miss Required RMDs, Face Big Penalties," Money.com, citing Vanguard research (money.com/missed-rmd-penalties/). IRS RMD Comparison Chart (irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans). IRS Publication 590-B, irs.gov/publications/p590b.
This material is provided for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. The information presented is general in nature and may not apply to your individual circumstances. You should consult your tax advisor, attorney, or financial professional before making any decisions regarding required minimum distributions (RMDs) or retirement accounts. Any strategies discussed are illustrative in nature and there is no guarantee that they will be effective or suitable for any particular individual. Tax outcomes will vary based on individual facts and circumstances, and no representation is being made that any specific result will be achieved. Data referenced from third-party sources, including Money.com and Vanguard, is believed to be reliable but is not guaranteed as to accuracy or completeness. Estimates and statistics cited may not reflect actual investor experience.