Does your client have an IRA account? Is your client over the age of 70½? If you answered “yes” to both questions, it’s important to help your client understand how required minimum distributions (RMDs) can affect her retirement withdrawal strategy. As a financial advisor, it’s important to be sure that your clients have all of the essential information regarding RMDs to ensure that they don’t make expensive mistakes. Below you will find some important considerations when advising about RMDs.
What are RMDs?
The RMD is the minimum amount of money the IRS requires you to withdraw from your IRA or retirement plan each year once you turn 70½. If the minimum amount is not withdrawn, you will be required to pay a 50% federal penalty tax on the difference between the amount you withdrew and the amount you were required to take.
To Whom Does It Apply?
Since IRA stands for “individual” retirement account, the IRS rules for RMDs apply to the individual only. The government requires that account holders take their first required RMD at age 70½ to prevent them from deferring the tax within their IRA forever. It’s important to also note that once you reach age 70½, the RMD applies for the remainder of your life.
How to Calculate the Minimum Distribution
To calculate how much your minimum distribution is, you must first determine the cumulative value of all of your retirement savings, then divide the sum by your life expectancy that year. Life expectancy factors can be found on the Uniform Lifetime Table provided by the IRS.