After decades of being told to save for retirement in tax-deferred 401(k), 403(b) plans and IRAs—and not to touch that money—it may seem odd being forced to withdraw from those accounts. But
“RMDs are how the federal government collects taxes from those savings, so people don’t defer taxes indefinitely,” says Tony Watson, an advice services consultant at Thrivent.
How are RMDs calculated and taxed?
As a Thrivent client, we’ll notify you when it’s time to start taking your RMD and calculate your amount, which is taxed at your usual income tax rate. RMDs are determined by taking your previous year’s retirement account balances and dividing each one by your age-dependent life expectancy set by the IRS.
The IRS provides a
If you have multiple IRAs or multiple 403b plan accounts, the RMDs for each of the accounts are calculated separately. But the total amount of the RMD for your IRAs and 403b accounts can be pulled from one IRA or 403b plan account or spread across multiple IRAs or 403b plan accounts, as long as the RMD is satisfied separately for your IRAs and 403b plan accounts. If you have multiple 401(k) plans, an RMD must be calculated and paid out from each individual account.
What happens if you don’t take RMDs?
If you don’t take your RMD by December 31 every year (or the following April if it’s your first year of RMDs), you’re subject to a 25% excise tax on the amount not withdrawn, but this penalty is reduced to 10% if you take the missed distribution within two years.
There are a couple of exceptions: If you are still working and own less than 5% of the company that sponsors your retirement plan, and your company retirement plan allows for delayed distributions, you don’t have to take a distribution from your current employer's plan until after you retire. You would still be required to take RMDs from any of your IRAs, or previous employer plans. Additionally,
Are there restrictions on how you spend the RMDs?
“It’s your money, so you can spend it how you want,” says Watson, noting that you can withdraw more than the RMD. “If you don’t need it to fund your retirement, you could invest it in a taxable account, spend it on experiences or travel, use it for insurance premiums or gift it to heirs now so they can enjoy the money while you’re living.”
Another option is to take a