How do you avoid having to take Required Minimum Distributions (RMD’s)? You can’t. But, you might get to wait longer before you have to take them.
RMD’s are a distribution from a pre-tax IRA or 401k retirement account. When you contribute to a pre-tax retirement account, you often get to defer paying personal income taxes on that contribution. The profits grow tax deferred as well. However, Uncle Sam wants their tax revenue at some point.
That “point” is when money is personally taken from the retirement account as a distribution. Before the age of 59.5, a distribution not only incurs the tax, it incurs a 10% penalty. That penalty drops off after 59.5.
Even if you do not ever want to take your IRA funds money as a distribution, that is not an option. This is where the RMD’s come in. The government mandates that you start to take distributions at a certain age. That age has been 70.5 for a long time. The new SECURE ACT has raised that to 72.1 for people born on or after July 1, 1949.
What happens if you do not take the RMD? You will pay a 50% penalty on the amount you were required to take.
The amount of the RMD is based on the total of all pre-tax IRA accounts. The pre-tax money in the 401k also has RMD’s. You can take your IRA distribution from any pre-tax IRA account, either all from one account or you can split it among your IRA accounts. The 401k distribution must be taken from the 401k account. If you own non-liquid assets in your IRA, like real estate or a loan, you must factor those assets in as well. That can cause issues for someone who has minimal cash in the IRA’s, only non-liquid assets. You will need to factor in how much money you will need for the RMD’s when planning your retirement strategy.
RMD’s are calculated by a life expectancy table published by the IRS. The table has remained the same since 2002. There is a separate table for spouses who are younger than the deceased spouse by more than 10 years. President Trump has asked that the table be examined to see if a change is in order. The IRS has published the proposed changes, but the current table remains in effect. It is expected the new table will go into effect January 1, 2021.
You should always talk with your tax advisor about questions on tax-related issues.