Many people are surprised by how large their Required Minimum Distributions (RMDs) are in retirement. You should prepare for the tax hit that comes with these withdrawals by using a good RMD calculator to project your RMDs.
Let's first define what RMDs are: If you are age 70½ or over and have a Traditional, Rollover, SEP, or SIMPLE IRA, you are legally required to take RMDs annually.
Calculating Your Projected RMDs
Note that an RMD Calculator is a good starting point, but in reality you want a financial planning software tool that will calculate your changing tax rate in every year. The WealthTrace Financial and Retirement Planner does just that. It will accurately calculate your tax rates and RMDs in every single year. You can use it for free by signing up here.
When you withdraw funds from one of the account types subjected to RMDs, you are taxed on those withdrawals. Use our RMD Calculator to project the withdrawals and the taxes. The calculator is also shown below for your convenience.
Don't Miss That RMD Deadline
If the RMD amount is not withdrawn by the deadline, the IRS assesses a 50% excise tax on the amount that is not withdrawn. This is known as an excess-accumulation penalty. If you take out only a portion of the required RMD amount, the penalty is assessed on the left-over balance. For example, if you calculated an RMD amount of $10,000 and you withdrew $5,000. You will be assessed a 50% excise tax on $5,000. Note that most brokerage companies and custodians will let you know when your RMDs are due.
RMDs On Roth IRAs
It is important to point out that there are no RMDs on Roth IRAs while the owner is alive. This is a great attribution of Roth IRAs and exists because Roth IRA withdrawals are not taxable. To learn more about the benefits of using a Roth IRA and to use our free Roth calculator, go here.
How To Recover From A Missed RMD Withdrawal
If you find yourself under the stressful predicament of having to pay this tax due to a lapse, you can request a waiver from the IRS. The IRS requires that you send them a letter of explanation asking for a waiver with your income tax return. The excise tax is reported on IRS Form 5329, which may be obtained at www.irs.gov. You might want the assistance of a retirement planning expert or tax professional when requesting the waiver.
What effect will RMDs have on your retirement plan? WealthTrace can help you find out. See how the taxes generated by your RMDs affect your plan chances of achieving your retirement goals. Use a free trial of WealthTrace to find out more.
- Account balance as of 12/31 of year prior to distribution year
- This is the fair market value of your account as of the close of business on December 31st of the preceding year. For traditional IRAs, no adjustments are made for contributions or distributions after that date. If you made a transfer or rollover from one account on or before December 31st of the preceding year and the funds were received by a new account in the next year, you will need to increase your December 31st fair market value by the amount that was transferred or rolled over and not included in the December 31 value of either account.
- Your age as of 12/31 of distribution year
- Use your age as of 12/31 for the year you are calculating the distribution.
- Is your birthday after June 30th?
- Check this box if your birthday is after June 30th. This is a factor in determining whether the IRS requires you to begin distributions when you are age 70 or 71.
- Is your sole beneficiary a spouse?
- Check this box if your only beneficiary is your spouse.
- Beneficiary age
- Use the age your beneficiary will turn on their birthday for the year you are receiving the distribution.
- Estimated rate of return
- This is the expected rate of return on your account. This is only used to help project your future account balances (which of course will impact your required minimum distribution).