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Minimum Distribution Rules: Key Things Every Retired Military Officer Should Know

Retirement Funding Taxes

Most people worry about not having enough money for retirement. Some people accumulate so much money, that it can cause issues due to Required Minimum Distributions (RMDs). Here's what you need to know about RMDs.

1. RMDs Depend on Your Age

The main point of RMDs is to keep money from staying tax-free forever. The government gave a temporary tax break if you contributed to TSP, a 401(k)/403(b) or an IRA to encourage you to save for retirement, but it still wants that tax money. A required minimum distribution is a required withdrawal from your retirement account. It counts in your taxable income just like any other withdrawal in retirement.

Currently, RMDs start the year you hit age 70 1/2. The amount of the the RMD is based on your age and is calculated by dividing your prior year ending balance by a factor found in an IRS table. While you are required to take a distribution for the year you turn 70 1/2 you can delay it until April 1st of the following year. That means you'll take two distributions that year.  It's important to realize that you do not have to spend all of this money. You can also reinvest it into a taxable account.

2. Not Taking the RMD Can Mean Big Penalties

Thinking about skipping RMDs to avoid taxes? Think again. Not only do you still have to pay the taxes on the RMD amount, but you'll also owe a 50 percent penalty.

For example, if you were supposed to withdraw $10,000 but didn't, the IRS will charge you an extra $5,000. The penalty repeats every year until you catch up on your RMDs from previous years.

3. RMDs Can Throw a Wrench in Your Tax Planning

There are many reasons why you might want to reduce your taxable income in retirement. These can include keeping your Medicare premiums down,  trying to stay in a lower tax bracket, or just wanting to pay fewer taxes.

Required minimum distributions can throw a major wrench in your tax planning because not only are they not avoidable, they can suddenly increase if the market surges. If you're using a tax strategy that requires reducing your income to a certain level, it's important to build in flexibility for your RMDs.

4. RMDs Can Be Reduced or Perhaps Avoided

There are still ways to reduce or even avoid RMDs altogether. The main idea is to get the money out of your retirement account when you want to not when the IRS wants you to.

One method is to make extra withdrawals at the end of the year. In December, you can estimate your taxes for the year. If you still have room in a lower tax bracket or below the income you need to stay under, you can withdraw additional money. When next year's RMDs are calculated, it will be on a lower account balance.

You can also convert to a Roth IRA instead of taxing the money out of a tax-advantaged account, after you've taken your RMD for the year. Roth IRAs don't have RMDs because the money has already been taxed. When you make the conversion, you pay ordinary income tax rates on the amount you converted. There are no penalties even if you do the conversion before you turn 59.5.

5. RMDs Can Be Given Directly to Charity

If you follow the rules, you can make a distribution from your IRA directly to a charity of your choice. If you do this, you can exclude the amount given to charity from your income. This is called a Qualified Charitable Distribution or QCD. This can be very valuable if you no longer itemize deductions and don't get "credit" for deductible charitable contributions.

Want to learn more about RMDs and how to plan your tax strategy? Talk to your financial advisor today.


If you found this article useful, you might like the following blog posts:

Military Finances 101: Retirement Accounts


4 Steps Military Officers Should Take Should Take When Inheriting an IRA


Retired Military Officer Finances 101: Taxes


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