In 2018, the first wave of baby boomers turned 72 years old. As of January 1, 2020, investors who reach this magic age must begin taking required minimum distributions (RMDs) from certain retirement accounts. To avoid penalties, investors need to understand the basic rules around RMDs.
What Is an RMD?
An RMD is the minimum amount of money that you’re required to withdraw from your retirement accounts, per each account’s guidelines. If you withdraw less than the minimum amount, you’ll be subject to a 50% IRS penalty on the remainder. You can withdraw more than the minimum required amount without facing a tax penalty.
Most IRA accounts and defined contribution plans — like 401(k)s and 403(b)s — have RMDs associated with them. The IRS annually updates plan rules and regulations, but it’s a good idea to consult a financial professional when opening or withdrawing from one of these accounts.
Who Has to Take RMDs?
Once you reach 72 years of age, you’re generally required to take out an amount that’s determined using your account balance and the IRS life expectancy chart. This means your RMDs will change from year to year.
It’s important to withdraw at least this amount by the annual deadline, or you’ll face tax penalties on the amount you didn’t withdraw. A financial professional can explain your options for taking withdrawals, help set up automatic withdrawals and answer any lingering questions you have about RMDs.
What if I Don’t Need My RMD Money?
If you don’t need the money from your RMDs, you can still invest it in other ways. One easy option is to simply reinvest the money in one of your other taxable accounts. A financial professional can look at your portfolio to help you make investments that support your objectives, time frame and risk tolerance.
You may also decide to use the money to help your kids and grandkids. Consider opening up a 529 account for your grandkids to help them fund their college education. You can also use this money to open a trust for your heirs or a charitable remainder trust to leave to a charity of your choosing.
American Funds can calculate your RMDs upon request, and we’ll set up the distributions so they will be taken proportionately from each fund in your accounts. You can decide whether to make your RMD withdrawals annually or more frequently.
The SECURE Act increased the age when required minimum distributions (RMD) must begin from 70½ to 72, effective for individuals turning 70½ on or after January 1, 2020. If you reached age 70½ before this date, you are still required to take RMDs.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
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