3 Important Questions to Ask About RMDs

There might have been a time in your life when you were busy learning all about retirement savings accounts and retirement annuities, but do you ever recall learning the details of required minimum distributions (RMDs)? As long as you have a tax-deferred retirement plan and live to be 73 (or 75 if you were born in 1960 or later), you'll be required to take an annual RMD. Think of it as the government's way to ensure you pay taxes on the funds you were able to invest tax-free.

Whether you're not old enough to take an RMD yet or you've been making withdrawals (and paying taxes) for years, you may have questions. Here are three of the most essential.

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1. What types of retirement accounts are subject to RMDs?

As mentioned, the purpose of RMDs is to ensure that the federal government receives the taxes it's owed. For that reason, the type of retirement plans that require RMDs are those that allow you to make contributions without paying taxes on the earnings. The rule applies to employer-sponsored retirement plans, including:

• Profit-sharing plans
• 401(k) plans
• 403(b) plans
• 457(b) plans

The RMD rule also applies to:

• Traditional individual retirement accounts (IRAs)
• SEP IRAs
• SARSEP IRAs
• SIMPLE IRAs

2. Should I take RMDs as a lump sum or multiple payments throughout the year?

You may not have any say over whether you're going to take an RMD, but you do get to decide whether you want to break the payments up. For example, if your annual RMD is $24,000, you can choose to take it all at once by Dec. 31 or in increments throughout the year.

If you're counting on the funds from your RMDs to help you pay the monthly bills, you may want to have the funds directly deposited into your bank account monthly. If you'd rather wait until the end of the year to give your money more time to grow, that works, too.

There's no wrong or right answer. It's all about doing what's best for your financial situation. The nice part is that you may switch your strategy from year to year as your situation changes.

3. Do I have to take an RMD if I don't need it?

Let's say you find yourself in the unique position of not needing the funds. Maybe you're pulling in enough each month with Social Security or a pension, or perhaps your aunt recently died and left you a small bundle of cash. Whatever the situation, you must take your annual RMD by Dec. 31 to avoid paying a 25% penalty.

If you accidentally forget to make a withdrawal by the due date, correcting the situation within a two-year window may knock the penalty down to 10% of the amount you failed to take.

If you're fortunate enough to make it into your 70s, RMDs will be a way of life. The more you know, the better decisions you can make.

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