401k Rollover

I always like to laugh when clients ask, “why is there a RMD or required minimum distribution for taking money out of my IRA if I don’t want to?”  I’ll reply, “…because the IRS has to get paid one of these days and they had to wait almost 71 yrs in your case.”

I never understood why there’s so many different taxations.  In addition to all of the state, federal, income, sales taxes, etc., they then throw in tax deductions, tax incentives, tax deferrals.  Wouldn’t it just make more sense to reduce overall taxes, thus getting rid of the need for tax incentives and deductions? No wonder America goes crazy around April 15th.  Let’s get back to what the RMD is all about.

All retirement accounts such as 401k, IRA’s, 403b’s, etc. were originally created to encourage individuals to plan for their own future, in hopes of reducing the financial dependency on our government.  For that reason, the government has allowed retirement accounts to grow tax-deferred up to age 70 1/2.  By that time, if a client has never withdrew monies out of their retirement account, they are required to start doing so.

We all understand that any withdraws or distributions from these accounts are considered taxable income.  This is where Uncle Sam is able to impose income taxes so he can get paid.  By age 70 1/2 there is a chart or table which can be found on the IRS website, that illustrates the percentage factor of what the minimum required distribution is every year thereafter.  The RMD chart will change from time to time, so it’s a good idea to check at the beginning of each year.  See below for the chart.

I then get asked, “What happens if I miss the RMD for the year or decide I don’t want to take a distribution?” Excellent question!  Let’s say you have a required minimum distribution you have to take out and that equals to $5,000.  This is just for illustrative purposes.  If you did not take out the $5,000, then the IRS can impose a tax on 50% of that amount.  This means, you didn’t take anything out, and are required to pay taxable income on the $2,500.   Depending on your tax rate at that age, it could be 10%, 15%, or 20%.   It’s just better in my opinion to take that out the $5,000 and enjoy that vacation you’ve always wanted.  After all… any year after 71 is a good year!

RMD Chart

Required minimum IRA distributions

We’ll go over how to calculate the RMD in the next post.

Need Help With  Calculating Your RMD?

Ask Binh

Binh Nguyen

(832) 273-3392

admin@401krollovers.info

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