Retirement planning is a favorite topic among investors because it offers the hope of a relaxed lifestyle with financial security. And certainly, that is the goal, but to achieve that dream requires making good long-term decisions with the help of retirement experts.
It also helps to start the planning as early as possible, being realistic and understanding which income and investment strategies can make the biggest difference in the end.
Here are some of the most important considerations:
After decades of not paying taxes on their retirement accounts, investors often forget that the money is only tax-deferred, not tax-free. Starting at age 72 (or age 70 ½ if you reach that age before January 1, 2020), the IRS requires that you take an annual withdrawal called an RMD and pay tax on that distribution as it is considered income.
The 2020 CARES Act Waiver… Due to the pandemic, the Coronavirus Aide, Relief and Economic Security (CARES) Act waived the 2020 Required Minimum Distribution for retirement account holders. However, that waiver did not extend to 2021 although future legislation might.
The 2020 SECURE Act and Non-Spousal Beneficiaries… As of January 1, 2020, non-spousal beneficiaries of decedents who passed away on or after that date now have up to 10 years to withdraw their entire Inherited IRA. Previously, they could stretch it over their lifetime expectancy in order to defer taxes.
No Fooling. Initial Withdrawal is required by April 1… You are required to take your first RMD by April 1 of the year after you reach the required age or face a stiff IRS penalty. That penalty will equal 50% of the amount not withdrawn in time in addition to the income tax due. After that initial withdrawal, the subsequent deadline is December 31.
Another Reason Not to Delay… If you wait to take your first RMD by April 1 of the following year you turn RMD age, you will have to take two RMDs, one for the previous year and one for the current year. This could possibly push you into a higher tax bracket so be sure to discuss with your tax consultant before making that decision.
How Much To Withdraw… The RMDs rules differ for IRAs and 401ks, so it’s always best to check with your financial advisor to be sure you are withdrawing the correct amount. That amount is based on age, account balance (as of Dec. 31 of the previous year) and life expectancy.
When to Take the Money… December 31 is the deadline for taking the RMD but withdrawals can be taken any time prior to that. You can even have the money withdrawn automatically every month or quarter depending on your needs.
Roth IRAs are exempt… If you are the original account holder, there is no RMD on a Roth IRA account because you paid taxes on that money prior to making the contributions. Inherited Roth IRA accounts are not exempt.