Is There a Best Way to Receive Required Minimum Distributions?

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As you get closer to the age when you need to take required minimum distributions (RMDs) from your retirement accounts, you are likely wondering about the best way to do it. There are several ways, but any of them depend on your circumstances.

When you get closer to the RMD age of 72, you will be notified that it is time to choose how you want your money distributed. If you reach age 72 after 2020, you are required to take your first RMD by April 1 in the following year, according to Kiplinger. After that, you must annually get your withdrawals by December 31.

The penalty for not taking out an RMD—or not taking enough out—is subject to a severe penalty by the Internal Revenue Service. It is equal to 50 percent of the RMD money that you did not take out of the account. The IRS may forgive the oversight if you fill out IRS Form 5329 and explain your reason—and how you corrected it.

Lump-Sum Payments

You could take your RMDs as a lump sum, monthly payments, quarterly, or semiannually. Here is a look at some of the benefits and problems you might face with each option.

One of the first things you need to think about is the tax implications. Some of the money put into your retirement account is probably pretax, which means you will need to pay taxes when withdrawing it. The taxes are reported on your annual tax forms and at your regular income tax rate. It could put you into a higher tax bracket.

Some of the money may also be aftertax. This money would likely have come from your employer if they made contributions. You should be prepared to pay any taxes that may be due. Your account manager can tell you how much you will owe when you withdraw it.

Withdrawals can also raise your income levels enough so that you might need to pay more for Medicare. It could also affect your Social Security income.

Calculating Your RMDs

You can calculate how much money you need to take out of your retirement accounts by going to an RMD calculator table, such as the one offered by MerrillEdge. After finding out how much you have in all your retirement accounts, you need to look at the table, find the number next to your present age, and divide the total by that number. The result is how much you need to take out for the year. Recalculate it each year, instead of guessing, to avoid any possible mistakes and penalties.

Monthly Distributions

Depending on your need for money, monthly distributions could be the best way to get your RMDs. It would give you a steady income flow, enable you to plan a better budget, and it will enable you to get a good amount of tax-deferred interest.

A potential problem with monthly distributions is that you will have more trading costs. If your savings are not getting much interest due to inflation, you may want to consider getting your distributions less often.

Annual Withdrawals

If you do not need the money, you could leave it in the account until the end of the year. Forbes mentions this approach would enable you to get the maximum interest—but you must make sure that you do not forget to withdraw it before the year’s end.

January Withdrawals

You could also withdraw your RMDs at the beginning of the year. MarketWatch suggests you might do this to get it out of the way and not have to worry about forgetting it. It might also make sense if you are going to give it away to a charity.

Paying Taxes on RMDs

No matter how you choose to take your RMDs, you must ensure that you have enough money set aside to pay for your taxes. SmartAsset recommends that if you want monthly withdrawals, you should ask your portfolio manager to deduct the taxes for you—freeing you from the responsibility.

Three Ways to Avoid RMDs

1. Rollover to a Roth IRA

Kiplinger mentions other benefits of making a conversion to a Roth IRA. The money you take out of it is tax-free. It means that any payments you take out of a Roth IRA will not affect your Medicare and Social Security benefits, and it also will not affect your income tax bracket.

Taking any money out of other accounts and rolling them into a Roth IRA means that you must pay taxes on all money taken out of those other accounts, says Investopedia. Your tax advisor can help you know how much those taxes will be. An alternative would be to only rollover some money, which should also lower your RMD.

2. Give to a Qualified Charitable Distribution

Another option that you could choose is to make a qualified charitable contribution to a 501(c)(3) organization. Schwab says you can donate up to $100,000 annually to a qualified organization, but you cannot deduct the money. The money can count as an RMD and will not be part of your taxable income.

3. Continue Working

A third way to avoid having to take RMDs is to continue working after you turn 72. If you have a 401(k) through your employer and you do not own more than 5 percent, mandatory RMDs are not required.

If your employer permits other contributions, you may be permitted to rollover other retirement accounts into your 401(k). Otherwise, you will need to take RMDs from other 401(k)s and IRAs. Kiplinger says that you will need to pay taxes on any amounts rolled into your 401(k), so you may need to roll small amounts at a time into it. You also need to take your RMDs from those other accounts first.

You will need to consider the best way to receive RMD based on your situation. If you are unsure, talk to your tax accountant, and be sure to understand all the tax implications before deciding. It may be necessary to withdraw an IRA minimum distribution and a 401(k) minimum distribution simultaneously if you have both accounts. At the same time, you may also want to seek planning for your beneficiaries and ensure they are named on your retirement accounts.

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