This week I’m talking about Required Minimum Distributions, otherwise known as RMDs. When you reach the age of 70 ½, you must start distributions from your IRA, 401k, and other qualified accounts by the end of each calendar year. There are some exceptions to this mandate, a couple of which I explained yesterday, but generally, yes, sorry, you will have to start taking RMDs once you reach age 70 ½, and include those RMDs in your taxable income for the year, which also means paying taxes on those withdrawals.  

And that brings me to today’s topic: Understanding net vs. gross distributions for your RMDs. 

Because RMDs are included in your taxable income, many of you will likely want to withhold a portion of your RMD to pay the taxes, so you’re not slapped with a surprise tax bill next Spring. 

For example, let’s say that it’s your first year taking your Required Minimum Distribution and the RMD amount is $10,000 from your IRA. 

You have 2 options: You could take the full amount out of your IRA - $10,000 and have that amount deposited directly to your bank account or sent to you as a check, or transfer the money to a non-IRA taxable account. This is a gross distribution, because you are taking the full amount out of the account without withholding any of it for taxes. 

Now, because you are reporting that withdrawal as part of your taxable income for the year, you’re likely going to have to pay taxes on that withdrawal. This is where net distributions come in. So using that same example of an RMD of $10,000, you could withhold a specific amount on that withdrawal for taxes. 

So let’s say you decide to withhold 20% for taxes. The gross distribution amount is still $10,000, but 20% or $2,000 of that is withheld and sent to Uncle Sam for the taxes, and you receive a net distribution amount of $8,000.

Tomorrow, I’m going to talk in more depth about what you should withhold for taxes, but for today, I hope you now have a better understanding that the difference between gross vs. net distributions is all about taxes. 

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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