Welcome to a new week and a new theme here on the One Minute Retirement Tip! 

This week I’m talking about Required Minimum Distributions, otherwise known as RMDs. When you reach the age of 70 ½, you have to start distributions from your IRA, 401k, and other qualified accounts. This topic is a big source of confusion for our clients, especially this time of year when there’s a push to satisfy those RMD requirements before the end of the year. 

I talked to my staff and asked them the most common questions they get about RMDs, and I’ll be covering those questions and my answers in each episode this week. 

Today, I want to lay the groundwork by discussing the rules that govern IRAs and the rules associated with them, so you can gain a better understanding of why RMDs are a thing, and why they’re required. 

When you have money in an IRA, 401k, or some other type of qualified account, you receive a tax deduction when you put money into those accounts. Then, the money grows tax-deferred, often for 20, 30, or even 40 years or more. Getting that initial tax break and paying zero dollars in taxes on your investments for decades is a pretty sweet deal, and it exists to help incentivize people to save more for retirement, so we all won’t be broke when we’re 80. 

But at some point, the tax-deferred gravy train comes to an end, and that happens in the year that you turn 70 ½. In that year, the government comes back to you with a hand extended and says: “Ok, I’ve been pretty generous here for many many years, letting this money grow for you without you paying me any taxes, but now, you have to start taking money out, reporting the income, and paying the tax. 

The required withdrawals start around 3% of your account value and gradually increase from there, with the goal that if you make it to 90 or 100, you end up depleting most of the account, and paying taxes. 

In the end, even though you’re forced to withdraw a minimum amount from your retirement portfolio pay the taxes on that, it still works out to a better deal in the long-run than saving and investing that money in an account that is taxed every year on income and capital gains. 

I hope that gives you an understanding of the RMD basics and the why behind it as we embark on the topic of RMDs this week. 

And even if you’re not even close to age 70 ½ and think this week’s topic doesn’t apply to you, think again. Because you many have an inherited IRA that requires distributions long before you are required to take distributions from your own IRA or 401k, and many of these same rules that I’ll be covering this week will apply to inherited IRA RMDs as well. 

That’s it for today, thanks for listening. My name is Ashley Micciche...and this is the One Minute Retirement Tip. 

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