Required minimum distributions (RMD) are mandatory withdrawals from several types of retirement accounts. As you approach retirement, RMDs are an important part of the funding puzzle you must manage. However, they can also be somewhat complicated and affect most other pieces of your retirement. To help you navigate your RMD obligations and make the most of them, here are five tips to apply.
1. Remember All RMDs.
First, you are responsible to calculate your own RMD obligation each year. Brokerage companies help out by providing their own calculations, but ultimately it's up to each taxpayer. If you have more than one traditional IRA or 401(k), calculate the minimum for each account separately. Consult with an experienced tax pro to make sure you have the right numbers and aren't penalized by the IRS.
2. Strategize How to Use It.
Because RMDs are mandatory, many retirees use them as a first layer of retirement income. Then, they plan other account withdrawals around this base money. However, others approach them as a last layer, or buffer money. By not factoring in RMD amounts when planning monthly budgets, this money provides wiggle room if you miscalculate — something common in the early days of retirement.
3. Don't Feel You Must Spend.
You have to withdraw this money from tax-advantaged accounts, but that doesn't mean you must spend it. If you're still working when RMDs begin, for instance, you can move the money to taxable investment accounts or even into Roth accounts. This builds up your nest egg and reduces later taxes.
4. Consolidate for Simplicity.
Those who do have multiple old 401(k) plans or traditional IRAs may want to consider consolidating them before RMDs begin. Unless there's a compelling reason to keep an old account open, you simplify your life by consolidating them into fewer accounts. Because you're responsible for making sure your RMDs are completed each year, you'll have less to worry about.
5. Consider Withdrawing From One.
After you calculate your RMD totals, where should you take them from? While the amount is mandatory, it doesn't have to be withdrawn from each separate account. You might, then, gradually clear out one or two accounts by strictly withdrawing from these to satisfy your RMD. This reduces the volume of accounts and allows you to let better-performing accounts grow longer.
Want more tips for making the most of your RMDs and avoiding unnecessary tax penalties? Start by meeting with a retirement planner in your state today.