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Four Things to Know About RMDs

Required Minimum Distributions (RMDs) from your retirement plans can be a really tricky thing to navigate. As you probably know, RMDs are withdrawals you have to make from most retirement plans when you reach the age of 72 (it was 70 ½ for those of you born before July 1, 1949). The amount you’re required to withdraw depends on the balance in your account at the end of the previous year, and your life expectancy as defined by the IRS.

Missing your RMD will likely result in you paying a penalty tax of 50 percent of the amount you missed. Not good. The more you know about RMDs, the less likely this will happen, so here are four things to know about RMDs.

1. Grace Period on Your First Withdrawal

First, there’s a grace period on your first withdrawal – But only your first withdrawal. Once you turn RMD age, you actually have until April 1 of the following year to get it done. After that, all subsequent RMDs must be taken by Dec. 31 of each year. So if you do postpone your first one, you’ll have two amounts to take that next year. Is postponing your RMD a good idea? Maybe, but you should know that taking the extra money out could push you into a higher tax bracket since each withdrawal is added to your taxable income. So proper management and knowing your tax situation is crucial here.

2. Timing

Another thing to be aware of with RMDs is timing. In most cases, we’d like to see an RMD taken early in the year, as opposed to later. We did an entire video on that topic fairly recently, so if you want to know why we prefer an earlier RMD, we urge you to check that out.

But one question we sometimes get from people is this: if the markets are down early in the year, isn’t it better to wait to take the RMD and hope they recover before the end of the year, so that you’re not selling off an asset when it’s down in value? Here’s the good news about that: you don’t have to sell an asset for cash when you take the RMD. If you want to hang onto it, you can take it out of the account “in kind,” and simply pay the taxes on the current value. And given the situation that the value is lower than it was before, isn’t it better to pay taxes on that lower value, and then allow any potential recovery to happen in your personal account? You bet it is. This is where working with an advisor can be especially helpful.

3. Multiple Accounts

Another thing to know about RMDs has to do with multiple accounts. Your RMD for IRAs is calculated from the total of all of your IRAs combined. They look at it as one pool of money. So as long as the correct dollar amount is taken, it can come from just one account, or be spread among the various traditional IRA accounts you own, evenly or not. This can make things quite a bit simpler, since you don’t have to take separate distributions from each IRA.

However, you can’t do this with company retirement plans like a 401k or 403(b). If you’re retired completely, you’ll have to take a separate RMD from each 401k, 403(b), 457 or other retirement plan you own.

4. Tax Implications

As said earlier, these RMDs are added to your taxable income, which means that if they’re large enough, they may wind up pushing your Social Security benefits into the taxable column, and may also subject you to higher Medicare premiums. Because of this, the time to think about your RMDs is not when you are required to begin taking them out, but probably several years before that. If you can find a way to reduce your RMDs ahead of time, you may save yourself a LOT in taxes later on – maybe for the rest of your life.

Yes, RMDs are often tricky. We at Lucia Capital Group strategize with our clients every single day on ways to potentially reduce the impact of RMDs. If you’re concerned that you may one day be overpaying in taxes, just give us a call. As always, we’re here to help!

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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