Surviving Retirement: RMD’s
May 30, 2017
As students of our profession, financial counselors are readily exposed to the necessary steps that lead to a successful and fulfilling retirement. We learn and pass on our knowledge about the importance of a spending plan, managing credit and debt, insurance, estate planning, the list goes on. However, while we account for the financial implications, too often we are not exposed to what it means to live in retirement. One term to know. Your RMD: Required Minimum Distribution.
What’s an RMD?
If you have an IRA, you must begin to withdraw money from your tax-deferred account(s) in the year in which you reach 70 ½. There is a minimum amount (Required Minimum Distribution) that must be withdrawn each year. Getting to the correct number is relatively easy, and guidance is provided in IRS Publication 590, but it’s important to know. ShThe penalty for failing to take the correct RMD is 50% of the amount that should have been withdrawn but was not. RMD’s do not apply to Roth IRA’s, only tax-deferred IRA’s.
How do I arrive at the correct number?
Not only is the RMD number relatively easy to arrive at, but many mutual fund companies and financial advisors are willing to calculate the correct number for you. I provided some basic data for my mutual fund custodian, and my custodian determined the amount I owed and made sure the amount owed in taxes was paid to the IRS and my part of the distribution was handled per my instructions. I did double check their work to make sure I understood how they arrived at my RMD number, and I suggest you do the same.
What do I do with the money distributed to me?
The real conundrum is deciding what you’re going to do with the money distributed to you. There are several options for the distribution and your challenge is to make the right choice for you.
Decision 1: When to take your distribution.
You can take your distribution as early as January of the year in which you turn 70 ½ or as late as April 1 of the year after you turn 70 ½. If you choose the latter, you will have to take two RMD distributions that year. You can take your distribution in a lump sum or you can take it on a monthly basis. The decision is yours. The key message here is that you MUST take the full amount of your RMD by April 1 of the year after you turn 70 ½ and each year thereafter.
Decision 2: Whether to take your entire distribution in cash, take part of it in cash and reinvest the rest in a taxable account, or reinvest the entire amount with your current provider or another investment opportunity.
I know from personal experience that there is a strong temptation to use your distribution as a reward for being a good saver all those years you were working. I succumbed to the temptation. I not only took my distribution at the earliest possible opportunity (January of the year in which I turned 70 ½), but I also took nearly the full amount to buy a fairly expensive motorcycle. Shocking, maybe. Fun, you bet.
A more conservative investor, and possibly smarter investor, may have taken the entire distribution and reinvested the money. Not me. I had my eye on this motorcycle for a long time and I saw my RMD as my chance to buy it, and to some level I did see it as a well-deserved reward for a lifetime of saving. Prior to my distribution, I had responsibly determined that I had enough funds accumulated to last my lifetime and, while I think it would be nice to leave a monetary legacy for my children and I still expect to do so, I also like me enough to occasionally reward myself.
Frankly, as a financial counselor, I’d probably recommend that any money received from an RMD be reinvested in another promising and age appropriate investment. However, I followed a different path. There are many thoughts about what is right and what is wrong relative to spending in retirement. I chose the path I felt comfortable with at the time and I haven’t looked back.
What decisions have you made with your RMD?
Guest Contributor: Wayne Hanson, AFC®