Military families face some unique challenges when saving for retirement, but accumulating wealth is only half the picture. Whether you are just getting started with your career or already on the cusp of retirement, it is important to plan for the distribution of the funds you are accumulating.
The government provides some powerful incentives for retirement savings, including tax-deferral until retirement. As a member of the military, you can put off withdrawing money from your Thrift Savings Plan, as well as any traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and 457 plans you or your spouse may have. However, in exchange for tax-deferred growth, savers are required to pay taxes on the money they withdraw in retirement - that is where RMDs come in.
What is a Required Minimum Distribution (RMD)?
As the name implies, a required minimum distribution is the amount you are required to withdraw from your qualified retirement plans. The age at which Required Minimum Distributions (RMDs) from qualified plans (401(k), TSP, 403(b) and IRAs) must begin has recently changed from the year in which the investor turns age 70.5 to 72. Note that this change applies to you if and only if you turn 70.5 in 2020 or later. If you turned 70.5 in 2019 or earlier, you must continue to take RMDs.
Given the severity of the tax penalties involved and the complexity of the rules governing RMDs, it is important to approach this subject with care. Making a mistake, even an inadvertent one, could have dire consequences for your wealth and your dreams of a happy retirement.
Mistake #1: Taking Distributions at the Wrong Time
The timing of your first RMD matters a great deal, in terms of both financial planning and potential tax implications. Not taking an RMD distribution on time is one of the most common, and most easily avoided, retirement planning mistakes.
You will need to take your first required minimum distribution no later than April 1 following the calendar year in which you turned 72. For example, if you turned 70 between the first of the year and June 30, your first RMD must be taken no later than April 1 of the following year.
For subsequent years, you must take your RMD by December 31, so put that date on your calendar! The amount of your RMD will be determined by your age and the amount in the account - early RMDs may be only a small percentage of the account, but as time goes on the percentages will tend to increase.
Mistake #2: Getting the Calculation Wrong
Withdrawing the wrong amount is another common blunder. Your RMDs are calculated by taking your account balance as of the end of the previous year, divided by your life expectancy factor, as published in an IRS table. If your spouse is more than ten years younger than you, you’ll need to use an alternate IRS table. If you are working with a Relationship Manager at AAFMAA Wealth Management and Trust LLC, that individual can help you determine the RMD amount, based on the balances of all of your qualified accounts.
Mistake #3: Not optimizing your RMD strategy
If you have multiple IRAs as well as your military Thrift Savings Account, you may think you have to take an RMD from each of those accounts, but that is not always the case. Not optimizing your withdrawals to meet your financial plan is a common mistake with RMDs, and one that is easily avoided.
The IRS allows the holders of multiple IRA accounts to aggregate those accounts. As long as the RMD amount is correct, it does not matter which accounts you tap - if you want to pull the funds from a single account, you are free to do that. If you prefer to take a prorated amount from each account, you can do that as well.
Mistake #4: Donating Your RMD to Charity in a Non-Tax Friendly Manner
If you have more retirement income than you need, you may also consider helping your favorite charity. If done correctly, you can avoid taxes on the money you withdraw and the money you donate will help a worthy cause, giving you and your favorite charity a double benefit.
When donating your RMD from an IRA, you’ll want to use a qualified charitable distribution (QCDs). QCDs allow you to make a direct distribution to a charity that isn’t factored into adjusted gross income, thus lowering your tax bill. Contrary, if you take the RMD and then write a check to your favorite charity, you will be taxed. You can choose to donate some or all of your RMD to charity. However, QCDs are limited to no more than $100,000 annually.
RMDs are a part of life for holders of qualified retirement accounts, and dealing with them can be very complicated. As you approach age 70-1/2, understanding the best way to avoid the most common RMD mistakes is essential.
If you have questions or need assistance with required minimum distributions, we are here to help! Please reach out to our Relationship Managers at AAFMAA Wealth Management & Trust. We can walk you through the process, and rest assured, we will always keep your best interest in mind.
*Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice. Nothing contained in this communication should be interpreted as such. We encourage you to seek guidance from your tax or legal advisor. Past performance does not guarantee future results.