RMDs 101 – How Does a Required Minimum Distribution Work?

Oct 22, 2024

With only three months left in the year, it’s time to work on your end-of-year to-dos. One priority is to satisfy your Required Minimum Distributions, or RMDs, before December 31. But how does a required minimum distribution work?  

If you’re a client, we’ve probably discussed your RMDs and may have helped you fulfill them already. If you’re not a client or you’re unsure whether you need to take an RMD, we can help.

How does a required minimum distribution work?

RMDs, or Required Minimum Distributions, come from an IRS mandate that says that those turning 73 years old or older this year are required to distribute, or take out, a minimum amount from certain tax-deferred retirement accounts, such as 401(k)s and traditional IRAs.  

If you started taking RMDs in prior years, you will keep taking them. If you only have Roth-based retirement accounts, you don’t need to worry about taking an RMD.

When do you have to take your RMD?

If you haven’t satisfied your RMD yet, you still have time. The final deadline for most people is December 31. If this is your first year taking an RMD, however, the IRS grants an extension. Still, it’s important to talk to your advisor to understand the tax implications of waiting.  

While you still have plenty of time to take care of your RMDs, if you miss the deadline, you can incur a 25% penalty on the amount you were required to withdraw. Reach out to your advisor soon if you have any questions or want to check this item off your to-do list.

What can you do with the money you withdraw?

When you take your Required Minimum Distribution, what can you do with the money you withdraw from your account? The first option is to move the funds from your retirement investment account to a non-retirement investment account.  

This is the best choice if you don’t need the funds or don’t have a desire to give the money away, as this approach keeps the money from leaving the market. You will have to pay taxes, but we will withhold the money for taxes when executing this transition between accounts.  

A second option is to send the money you withdraw to your bank account. Again, we will withhold taxes, but the money becomes available to use as you see fit.  

Finally, if you’d like a more tax-advantaged strategy, you can give the money you are required to withdraw directly to a 501(c)(3) charity and avoid paying taxes on it.  

You can also utilize a combination of strategies. For example, say your RMD amount is $6500. You can send $1000 directly to charity, $500 to your bank, and another $5000 to a non-retirement investment account. No matter your situation, we can assess the best distribution strategy for you. 

What should you do if you have questions?

Your advisory team can help you fulfill your RMDs and navigate special circumstances. For example, if you inherited a retirement account, talk to your advisor about distribution requirements and how to potentially minimize taxes.  

Finally, if you’ve satisfied your RMD from investments not held with Credent, be sure to let your advisor know, as excess withdrawals from outside accounts could potentially offset the amount you need to take from investments held with Credent. 

If you have more questions about how your required minimum distribution works, reach out to an advisor using the form below.  

Contributing Source: Internal Revenue Service. (2024, August 19). Retirement plan and IRA required minimum distributions FAQs. IRS. 

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