3 mistakes to avoid before taking Required Minimum Distributions
Uncle Sam wants your money.
He has bills to pay, just like you. And he's been
waiting patiently for decades for you to hand over his
share of your tax-deferred retirement dollars.
He expects some folks to be stubborn about it, so he
has an answer. It's called a required minimum
distribution (RMD), and savers who have money
stashed away in an IRA or qualified retirement
account (a 401(k), 403(b), etc.) are expected to take
money out and pay taxes annually once they turn
70½ (with some exceptions).
Many people don't realize this. When they get their
quarterly 401(k) statements, they think the dollar
amount at the bottom is all theirs to spend, however
and whenever they wish. But they're wrong - or
they've simply forgotten the bargain they struck with
the IRS back when they signed up for the account.
If you took your statements into the FBI building in
Washington, D.C., and held them under one of those
lights that reveals invisible ink, you'd see Uncle Sam's
name written right next to your own.
The required withdrawals are based on the balance in
your accounts as of Dec. 31 of the year before you
turn 70½ and your average life expectancy, according
to the IRS. And they increase by a small percentage
every year - so the bite can get bigger as you get
older. This is something to keep in mind and to
discuss with both your financial adviser and tax
professional so you can plan appropriately.
Here's the thing: RMDs are, indeed, required. There's
a whopping 50% penalty if you miss the deadline -
plus, to add insult to injury, you still have to pay
ordinary income taxes on the withdrawal. But you can
reduce the amount of money you hand over each
year with some smart long-term strategizing. Here are
three mistakes investors make that a little advance
planning can help avoid:
1. Reinvesting RMDs into a taxable account.
Imagine that you have three buckets where your
retirement savings can go. The tax-deferred
bucket (IRAs, 401(k)s, etc.) contains primarily pretax
money you won't pay taxes on until you use it
or when you reach 70½. The taxable bucket (nonqualified
investment accounts, bank accounts,
etc.) holds assets on which you pay taxes on as
soon as interest is earned. Year after year, you
pay tax, tax, tax. And then there is the tax-free
bucket (Roth IRAs, Roth 401(k)s, etc.), which has
a beautiful ring to it and is one of the best places
to be in retirement.
You would think every saver taking RMDs would
automatically spend those dollars or reinvest them
in a tax-free vehicle. But they don't. Many make the mistake of putting the money into taxable
Let's say, hypothetically, that you do this for 10
years in a row: Every year, you take out your
RMD and move it to a taxable account. You might
not realize how much you're slowly losing. But it
can add up to a large percentage of your life
savings. For example, 4% of 10 years = 40%.
2. Allowing a tax-deferred account to keep growing.
Many savers, trained to focus on accumulation,
happily watch their tax-deferred dollars increase
without considering the consequences. If you do
that until your RMDs kick in, though, you're
basically growing your IRA for the IRS.
Let's say you retire at age 60 and you have
enough income without touching your tax-deferred
money. It might seem crazy to take some of it if
you don't need to, knowing you'll have to pay
income taxes on it. But those years between 59½
and 70½ offer a golden opportunity to move your
money into a tax-free account, a little at a time, to
get some control over your tax bracket and your
looming tax burden. Many people do not use the
lower tax bracket to their advantage.
3. Letting a surviving spouse deal with the RMD.
Let's say you're a same-age couple whose nest
egg continues to grow in retirement - maybe it
even doubles. You start taking your RMDs at age
70½ when you're in the 15% tax bracket and your
status is married filing jointly.
Then, a decade later, when the RMD is much
higher, one of you dies - the husband. Suddenly,
the widow is filing as single, but with the same
assets. The RMD easily could throw her into a
higher tax bracket - 25% instead of 15%. That's
a 67% increase! Caught unprepared in an
already tumultuous year, she'll have to come up
with that money.
There's an old saying that there are three types of
people in this world:
Those who make things happen.
Those who watch things happen.
And those who wonder, "What happened?"
It doesn't have to happen to you, but you must have a
plan. And the obligation doesn't go away once you
retire - if anything, it gets more complicated.
Be a saver who takes control. Because the bottom
line is this: The more money you can keep away
from Uncle Sam, the more you'll have for you and
Important Disclosure Information
The article above was provided to Synovus by eMoney Advisor, LLC, and is used here with permission from eMoney or a third party content provider. eMoney does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This information was provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
You are about to leave the Synovus web site for a third-party site
Third-party sites aren't under our control, and we are not responsible for any of the content or additional links they contain. We don't endorse to guarantee the goods or information provided by third-party sites, and we're not responsible for any failures or inaccuracies. Third-party sites may contain less security and may have different privacy policies from ours.