You worked hard for many decades and saved money for retirement. You would think that since you earned that money, you can do with it what you want. Many people are surprised to learn that the government will force them to start taking money out of their retirement savings when they reach the age of 70 ½ years. Why is that? Maryland tax attorneys have been advising their clients on this rule for years. Here’s what you need to know.
By the end of each year, people 70 ½ or older must withdraw at least the required minimum distribution (RMD) from some of their retirement accounts. The reason the government imposes this rule is so they can finally tax that money. The rule applies to accounts for which the contributions were pre-tax dollars. Be aware that there are exceptions to this general rule.
Employer-based retirement accounts like 401(k) and 403(b) accounts fall under the RMD rule, as well as traditional individual retirement accounts and most other IRAs. Because you fund a Roth IRA with after-tax dollars, however, they are not subject to the RMD rule, unless you inherited the Roth account.
What Happens if You Do Not Withdraw the Money?
The penalties are hefty if you make a mistake about when and how much you are supposed to withdraw. Let’s say you were supposed to take out $20,000, but you forgot or did not know that you were supposed to do so. Your penalty will be half of what you should have taken out, so $10,000 of your hard-earned savings will evaporate and go to the government.
Do not fall into the trap of thinking you need not start making your RMDs until you retire. Your employment status is irrelevant to the RMD rule. The rule is entirely age-driven. Even if you are still working at age 70 ½, you have to take your distributions. Of course, there is an exception to this rule, as well. You might be able to wait until you retire to take a distribution from the 401(k) at your current employer, but you will have to withdraw money from other retirement accounts.
The Amount of Your Required Minimum Distribution (RMD)
There is no one set amount that everyone has to withdraw from their retirement accounts once they turn 70 ½. Your RMD will depend on your life expectancy and the amount of money in your account.
You can usually make your withdrawals however you like if you have more than one retirement account. Let’s say that you have investments in one retirement account that are performing much better than the market average and you do not want to sell those shares to make your RMD. You can take your distribution from another account, as long as your total withdrawal is equal to the required amount.
What to Do with the Money You Withdraw
The IRS requires you to withdraw the money from your account, but it does not mandate that you spend the funds. If you do not need the money for your living expenses right now, you can reinvest it (but not in your retirement account) or save it. You could make a donation to a charity or eligible non-profit, but the tax implications of charitable giving can vary.
Get Quality Advice from a Trusted Maryland Tax Attorney
We understand that tax regulations are complex. A Maryland tax attorney can answer your questions about RMDs and other tax-related issues. Contact Thienel Law today to schedule a time to plan your tax strategies. Maryland tax lawyer Steve Thienel is dedicated to assisting clients in Maryland, Virginia, and throughout the DC Metro area.