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When you contribute to a tax-deferred retirement account, such as a 401(k) or 403(b), you do so with pre tax funds. This provides you with the benefit of lowering your taxable income during the year in which contributions are made. Those assets are then able to grow tax-deferred within your account, which allows you to take advantage of compounding interest over time.

However, as Benjamin Franklin wisely declared, “Nothing is certain but death and taxes.” True to this sentiment, Uncle Sam will eventually want a cut of your earnings, and your tax delayed obligation will catch up to you in the form of a required minimum distribution (RMD).

If you’ve never taken an RMD before, it’s important to familiarize yourself with their requirements and complexities. The following answers to commonly asked RMD questions can help you prepare.

What are RMDs?

RMDs are mandatory withdrawals you must take from tax-deferred retirement accounts once you have reached a specific age. When you take the required distribution, you are subject to ordinary income tax on the amount withdrawn, which can significantly increase your annual tax burden, potentially pushing you up into a higher tax bracket.

Who is subject to RMDs?

Taxpayers are subject to RMDs once they reach a certain age. Individuals born between 1951 and 1959 must begin taking annual RMDs during the year in which they turn 73. Individuals born in 1960 or later must begin taking RMDs at age 75.

How do I calculate my RMD?

You can calculate your RMD using the following steps.

• Determine your year-end account balance for each tax-deferred account.
• Identify your life expectancy factor. Most people use the Uniform Lifetime Table provided by the IRS. However, if your spouse is more than 10 years younger, you may wish to use the Joint and Last Survivor Expectancy Table. If you are the beneficiary of an inherited IRA, you will use the Single Life Expectancy table.
• Divide your tax-deferred account balance by your life expectancy factor to determine your annual RMD.

Do I have to take an RMD if I’m still working?

Not necessarily. If your employer-sponsored plan allows, you may be able to delay taking RMDs from the plan until after you retire.

What happens if I don’t take my annual RMD?

If you don’t take your RMD, or you withdraw less than the full RMD amount, the IRS imposes a 25% penalty on the amount not withdrawn. You may be able to reduce the penalty to 10% by making a prompt correction within a specific correction window.

How can I reduce my exposure?
One of the most effective strategies for reducing your RMD tax exposure is by making a qualified charitable donation (QCD). If you are age 70 ½ or older, you can donate up to $108,000 per individual (up to $216,000 per married couple filing jointly) directly to a qualified charitable organization without triggering a taxable event. The amount of your donation is excluded from your taxable income for the year.

To qualify for exclusion, the QCD must be made prior to December 31 and must be issued directly to the charitable organization by the retirement account’s trustee. Distributions in your name are not eligible.

Also, QCDs can only be donated to 501(c)(3) charitable organizations. Donations to donor-advised funds and private foundations are not eligible.

At 3C Wealth Management, we understand that the complexities of RMDs can be overwhelming. That’s why we help clients simplify the process and take steps to reduce their income tax exposure.

If you could use some help navigating, withdrawing and planning for your RMD, we would love to have a conversation. Please schedule a call to learn more.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.