Are You Making this RMD Mistake? 84% Of Retirees Are!

Summary

In this video, Aaron discusses the common mistake retirees make regarding Required Minimum Distributions (RMDs). He explains the basics of RMDs, including their tax implications and the penalties for not withdrawing the required amounts. He highlights a study showing that many retirees only take the minimum amount, which may be a strategic move to avoid higher taxes. However, Aaron cautions against limiting withdrawals too much, as it could hinder retirees from fully enjoying their hard-earned savings. He encourages viewers to plan their withdrawal strategies based on their desired lifestyle and financial goals, not just the minimum requirement.

Takeaways

• 😀 RMDs (Required Minimum Distributions) are the minimum amounts that retirees must withdraw from traditional retirement accounts starting at age 73 (age 75 by 2033).
• 😀 Failing to take your RMD on time can result in a penalty of up to 25% of the amount you were required to withdraw.
• 😀 If the RMD mistake is corrected within two years, the penalty can be reduced to 10%, but it's still significant.
• 😀 Traditional retirement accounts like 401(k)s, IRAs, and 403(b)s are subject to RMDs, while Roth accounts are not.
• 😀 RMD calculations are based on account balances from the previous year and a life expectancy factor, which changes as you age.
• 😀 The IRS provides life expectancy tables to help retirees determine how much they need to withdraw based on their age and account balance.
• 😀 Many retirees limit their withdrawals to just the RMD to reduce taxes, but this might not be the best strategy for everyone.
• 😀 Only taking the RMD may be a deliberate tax strategy to avoid pushing yourself into a higher tax bracket by withdrawing more.
• 😀 Retirees who were aggressive savers may find that their RMDs are larger than necessary, leading to a hefty tax bill.
• 😀 While some retirees aim to preserve their wealth by sticking to the RMD, it can limit their ability to fully enjoy their retirement years.
• 😀 The goal of retirement savings should be to fund the life you want to live, not just to accumulate wealth for the future.
• 😀 If you have multiple income sources like Social Security or brokerage accounts, taking just the RMD from a traditional account might be a smart choice to avoid higher taxes.
• 😀 Legacy planning often plays a role in RMD strategy, with retirees potentially leaving larger accounts to heirs who may be in lower tax brackets.
• 😀 A balanced withdrawal strategy should take into account your lifestyle goals, overall financial picture, and potential tax consequences of larger withdrawals.
• 😀 RMDs are a requirement, but how you withdraw your funds and manage taxes is a more important part of your overall retirement strategy.

Q & A

What is a Required Minimum Distribution (RMD)?

An RMD is the minimum amount that the IRS requires you to withdraw annually from your tax-advantaged retirement accounts once you reach a certain age. The goal is to ensure the IRS starts collecting taxes on the money that has grown tax-deferred.

At what age do RMDs become mandatory?

RMDs become mandatory at age 73 starting in 2024 due to the SECURE 2.0 Act. The age will increase to 75 by 2033.

What accounts are subject to RMDs?

Traditional retirement accounts like 401(k)s, 403(b)s, IRAs, and similar employer-sponsored plans are subject to RMDs. Roth accounts, however, are not subject to RMDs during the account holder's lifetime.

Why might a retiree choose to only take the RMD?

Some retirees may opt to take only the RMD to minimize their taxable income and avoid higher taxes, as taking more than the RMD could push them into a higher tax bracket.

What is the penalty for not taking an RMD?

If you fail to take the required RMD, the penalty is 25% of the amount you should have withdrawn. If corrected within two years, the penalty can be reduced to 10%.

How is the RMD amount calculated?

The RMD amount is calculated by dividing the account balance as of December 31st of the previous year by a life expectancy factor provided by IRS tables.

What happens to the RMD as you age?

As you age, the life expectancy factor used to calculate your RMD decreases, which results in a higher percentage of your account balance being withdrawn.

Why might taking only the RMD be considered a mistake?

Taking only the RMD may limit a retiree's spending potential during retirement. It can prevent them from enjoying the lifestyle they’ve worked hard for, as it focuses only on preserving the account balance instead of using it to fund their life.

What is the broader issue with focusing solely on RMDs for retirement planning?

The broader issue is that by focusing solely on RMDs, retirees may miss the opportunity to spend and enjoy their wealth. RMDs are not meant to be a withdrawal strategy, and retirees should plan their withdrawals based on their desired lifestyle, not just tax savings or wealth preservation.

How can RMDs be part of an effective tax strategy in retirement?

By taking only the RMD, retirees can manage their taxable income to stay within a lower tax bracket. If their account balance is large, they might avoid taking more to prevent pushing themselves into a higher tax bracket, which would increase their tax liability.