What You Need to Know About RMDs

Let’s address a financial milestone that many of you might be approaching or have already crossed - the age of 73. This age is significant in the world of retirement planning because it marks the time when Required Minimum Distributions (RMDs) come into play. If you're unfamiliar with this term, don't worry – you're not alone. But brace yourself for a bit of a shock because, as we dig deeper, you'll discover the importance of RMDs and why they matter significantly as you approach your retirement years.

So, What Exactly Are RMDs?

You've been diligently saving for your retirement in accounts like 401(k)s or Traditional IRAs. RMDs are the IRS's way of saying, "You're 73. It's time to start withdrawing a portion of your retirement savings and it is time for us to collect the deferred taxes on those funds." If you've worked with an advisor, then you knew the day would come when you paid taxes on those funds, but what is the consequence of doing nothing? I will tell you now, it isn't insignificant.

The Shock Factor: The IRS Penalty if You Don't Take Action

If you don't take your RMDs as required, the IRS can impose a penalty of up to 25% on the amount you should have withdrawn but didn't. That's not a typo – it's a whopping 25%! Imagine losing a quarter of your hard-earned savings! It's a financial hit no one wants to experience, yet it happens. Why?

• Lack of Awareness: Some individuals may not fully understand RMD requirements or may not be aware that they need to take withdrawals from their retirement accounts at a certain age. In such cases, they might unintentionally miss their RMDs and incur penalties.
• Short-Term Cash Flow Needs: In some rare situations, someone might choose to forgo their RMD to meet an immediate financial need, despite the penalty. This is generally discouraged, as there are usually better options for accessing funds, such as considering other sources of income or a financial advisor's guidance.

Even with education on why you must take RMDs, awareness of the IRS penalty, and insight into why some people opt to do nothing, there are still emotional components at play that can cause people to freeze. Loss of control over your retirement savings, fear of outliving your savings, tax concerns, anxiety and uncertainty can all raise their ugly heads. So, what are some options to restore a sense of financial flexibility, autonomy, and pursuit of financial goals?

Two Alternatives to Taking RMDs: Strategies to Beat the Shock

There are two strategies I will share about that can help some people regain a sense of empowerment over the situation.

Roth Conversions: One powerful strategy is Roth conversions. This involves moving money from your traditional tax-deferred accounts into a Roth IRA. The beauty of Roth IRAs is that withdrawals are tax-free, which means no RMDs are required during your lifetime. Plus, it can be a tax-efficient way to pass on wealth to your heirs because they inherit it tax-free as well. So, you not only dodge the RMD bullet but also leave a tax-smart legacy.

Qualified Charitable Distributions (QCDs): Another nifty strategy is QCDs. If you're charitably inclined, QCDs allow you to donate a portion of your RMD directly to a qualified charity. The best part? The donated amount isn't included in your taxable income, and it counts toward satisfying your RMD requirement. It's a hands-off strategy that lets you support causes you care about while managing your RMDs efficiently.

The Bottom Line: Take Control and Plan Ahead

RMDs might sound like a financial shock, but with the right strategies in place, you can navigate this terrain smoothly. Roth conversions and QCDs offer you the power to take control of your retirement finances, minimize tax burdens, and ensure a brighter financial future.

Remember, these strategies should align with your unique financial goals, so it's essential to work with a trusted financial advisor who can tailor them to your circumstances.

So, here's the secret to RMD success: Stay informed, plan, and talk to your advisor about ways to navigate RMDs that work for your goals.