Required minimum distributions take on added urgency as you approach (and reach) age 73, with specific rules and tax implications. 

Seventy-three is an important age milestone for those in or near retirement, as it marks the time when required minimum distributions (RMDs) begin to be withdrawn annually from Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans (previously, the threshold was 72). The milestone carries with it tax consequences that are not fixed. Rather, there are a few rules to consider that can help you optimize the impact on your bottom-line.

IRAs

You must begin withdrawing from a traditional IRA by April 1 following the year in which you turn 73. The amount is based on your age with one exception: If you’re married and your spouse is more than 10 years younger than you, the RMD amount is based on your joint life expectancy. If your distribution is less than the required minimum, you will be penalized 25% of the difference. NOTE: Roth IRAs do not require an RMD.

Employer-sponsored retirement plans

For employer retirement plans — 401(k)s, 403(b)s, and others — the same timeline applies as per IRAs: You must begin withdrawing from the plan by April 1 following the year in which you turn 73. However, if you are still working past 73 and you own 5% or less of a company, you may be able to delay RMDs until you retire.

Additionally, depending on your circumstances, you may receive a lump-sum distribution from 401(k), profit-sharing, and stock-purchase plans if completed in a one-year period. For tax purposes, RMDs from qualified retirement accounts are taxed as ordinary income.

Calculating your distribution

The institution where your retirement is kept typically determines the RMD amount using the formula:

Total balance as of December 31 divided by your life expectancy = distribution amount.

However, there is some leeway here that may provide you with more beneficial tax consequences:

–You can either take your initial RMD in the year when you turn 73 or up until April 1 of the following year.

–If you delay your RMD until the following year, you must take two RMDs that year—which may increase your tax consequences.

–You can take your RMD as a series of withdrawals rather than one lump payment, which may help you with monthly cash flow.

–Update your beneficiary/beneficiaries as to your distributions. For IRAs, account holders can designate anyone as a beneficiary; For employer-sponsored plans, they must designate their spouse as a beneficiary unless the spouse specifically waives the right.

Seek help

Tax consequences for RMDs can be significant and seeking the support of a financial professional can be prudent, to ensure that the results align with your goals

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Disclaimer: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Source/Disclaimer: *Interest income may be subject to the alternative minimum tax. Municipal bonds are federally taxfree but other state and local taxes may apply. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not protect against market risks. Qualified accounts such as 401(k)s and traditional IRAs are accounts funded with tax deductible contributions in which any earnings are tax deferred until withdrawn, usually after retirement age. Unless certain criteria are met, IRS penalties and income taxes may apply on any withdrawals taken prior to age 59.. RMDs (required minimum distributions) must generally be taken by the account holder within the year after turning 73. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. This material was prepared for Crystal Rickard and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.