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  • Wendell Brock

Unavoidable

We can’t escape paying taxes. It’s a part of life; it’s unavoidable. Even folks that try to evade paying their taxes end up paying. Afterall, failing to pay his income taxes was the tipping point in being able to convict famous mob boss, Al Capone. One way or another, Uncle Sam gets his payday. So, what does this mean for your retirement accounts?


Required Minimum Distributions (RMDs) are a minimum amount you must withdraw from your retirement accounts and act as a safeguard for the IRS against people using a retirement account to avoid paying taxes. Since traditional IRAs and 401(k) plans use pre-tax dollars, the IRS enforces RMDs to keep people from avoiding paying the deferred tax which is owed on the contribution. RMDs generally kick in when you reach age 72.


The amount you are required to withdraw changes from year to year and is determined by your life expectancy. It is calculated by dividing your account(s) year-end value by a factor associated with the estimated remaining years of your lifetime based on a table that can be found on the IRS website.



To calculate your RMD, the first step is to determine your account(s) balance as of December 31 of the pervious year. Then, using the IRS chart, find the distribution factor that corresponds to your age on your birthday for the current year (The factor number goes down the older a person gets). Then you divide your account(s) total by the factor number. Your withdrawal can occur periodically throughout the year, but the total amount must be withdrawn by December 31 of the current year. There are a couple different tables used when finding your divisor for beneficiaries of retirement accounts and for account holders that have a spouse that is much younger, make sure you use the one that applies to your situation. Click here to see the IRS RMD Table iii.


Here’s an example: Let’s say Abe turned 74 on September 3rd of 2023, and his IRA was worth $300,00 on December 31 of the prior year. Abe would need to divide $300,000 by 25.5 (from IRS table iii), making his RMD $11,765. If Abe has multiple IRAs, he will need to calculate the RMDs separately. Depending on the type of retirement accounts Abe has, he may be able to add all the RMDs together and withdraw the totals from one account, otherwise he will need to withdraw from each retirement account separately.


The minimum distribution rule applies to the original account holder and their beneficiaries in the following types of plans: Traditional IRAs, SEP IRAs, Simple IRAs, 401(k) & 403(b) plans, profit sharing plans, and Roth IRA beneficiaries.


Most people begin making withdrawals from their retirement accounts before the required 74-year threshold. If you put off your withdrawals until later, it could bump you into a higher tax bracket. It’s important to have a retirement plan involving tax strategy.



Photo by Josh Appel

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