Required Minimum Distributions

“Why is the government making me take my money out?” As a financial advisor, I hear this question frequently. When you reach 70 ½, you must take Required Minimum Distributions (RMDs) from your retirement accounts. It isn’t a large amount, less than 4% the first year.

The reason you need to take money out of your retirement accounts isn’t as evil as people make it out to be. This of it this way:

When you were making money, you could put $1,000 into your IRA, 401(k), 403(b), or other qualified retirement account. If you didn’t put it into your account, the money would end up in your checking account. However, you would receive less, because you would pay tax on it. If you were in the 25% tax bracket, you would have $750, and Uncle Sam would get $250.

Fortunately, you decided to put the money into your retirement account instead. You kept Uncle Sam’The $1,000 would continue to grow and grow. Even Uncle Sam’s portion would be working for you! In fact, this is like an interest free loan from Uncle Sam!

The IRS says you must start taking money out of your IRA at 70 ½. Why 70 ½? Why not 70 or 71? I have researched this quite a bit and found no definitive answer. My best guess is this is a result of a compromise.

Your RMD is calculated by a formula. They look at your account value at the end of the previous year. This amount is divided by your life expectancy. For example, if your IRA was worth $100,000 on 12/31 of the previous year and you will be 70 in the year in which you turn 70 ½, $100,000 divided by 27.4 = $3,649.64.

Now that you know how much money you must take out of your account, what do you do with it? First, most people withhold a portion for taxes. Talk to your tax accountant to see how much they recommend.

What do you do with the rest of the money? You have three choices, save it, spend it, or give it away. Let’s talk about these options:
  • Save it – You can put the money into your savings account or into an investment. This money can be for a rainy day.
  • Spend it – This money can be used for living expenses, vacations, Christmas presents, or anything else you can think of
  • Give it away – If you don’t need the money consider giving it to a charity or organization you are passionate about. It can go to your church, the local food bank, or any of the thousands of wonderful groups out there. Best of all, if you use a Qualified Charitable Distribution (QCD) your RMD can be tax free! (see this article)

When is the best time to take your RMD? There really is no best time. I have some clients who like to take it in the spring so they have money for summer trips. Other clients take it in October so they can buy Christmas presents for grandkids. Some clients take it monthly to supplement their income. Just find a distribution method that works for you.

If you have a Roth account (Roth IRA, Roth 401(k), etc.) the good news is you never need to take an RMD from this account. This account can remain tax free and go on to your heirs if you wish.

What happens if you miss your RMD? This is a big penalty – 50% of what you should have taken out. If your RMD should have been $4,000, you owe a $2,000 penalty. It is cheaper to take the money out and pay the tax. You can fill out IRS Form 5329 and try to have the penalty waived. They will often forgive a mistake.

Required Minimum Distributions are just a fact of life and not that complicated. They are not an evil attempt by the government trying to get your money. In fact, they just want part of their money back.

Paying Extra on Your Mortgage: Good Idea or Bad?

Many people dream of that paid off home mortgage. It really is a great goal, but could there be other goals that are more important? This is where you need to think logically, not emotionally.

It is important to realize that your retirement accounts will generate income for you. This income can be used to supplement your Social Security. According to the Social Security Administration, Social Security can replace up to 40% of your pre-retirement income while most people need 70% of pre-retirement income for living expenses. Without enough money in your retirement accounts, you may not have enough income!

For many people, their priority should be funding their retirement accounts and emergency accounts. Fund 401(k), IRAs, Roth IRAs first, and if there is extra money left over, then you can put it towards your house. The money in your retirement accounts can grow with time (see Time is Money).

These days we see TV stars extolling the benefits of the reverse mortgage. "It can provide extra money to live on," they say. And this is true. But a reverse mortgage can be an expensive way to take money out of your house. If these people could go back in time and max out their retirement savings before paying extra on the house, they might be in a better position.

What really counts in retirement is cash flow. If your income covers all your expenses, you are doing fine.

Inheriting an IRA? Here are some Dos and Don’ts

Many people who inherit an IRA think they will roll the decedent’s IRA into their own. This is permissible in some cases and prohibited in others. To complicate things even further, sometimes when it is permissible, it is still the wrong thing to do. So how do you decide?
One option is to take all the money out at once. For some people, this can be quite a taxable event. If you don’t feel like paying a large amount of taxes, read on.

The first thing to determine is are you the spouse of the decedent. If you are the spouse, you have more options. If the decedent is your parent, child, sibling, relative, or friend, then you are a non-spouse beneficiary and must go by those rules.


If your spouse passes away, one option you have is to roll the deceased person’s IRA into your own IRA. This has a number of advantages:
1.     Simplification – fewer accounts makes life much easier
2.     RMDs – Required Minimum Distributions that start at 70½ will be based on your age. This can be a big benefit if your spouse was older.
3.     Protection from creditors – Inherited IRAs are not protected from creditors. By rolling the money into your own IRA, you gain creditor protection.

There are some disadvantages to rolling a deceased spouse’s IRA into your own:
1.     Age 59½ - If you are not yet 59½, you might think twice about rolling the IRA into yours. What if you need the money? You will be penalized 10% if you take the money out before age 59½. Instead, if you convert it to an inherited IRA, you will have the ability to take money out of the account without the 10% penalty, even if your spouse was younger than 59½ at passing.


If you are a non-spouse beneficiary of an IRA, you have some options which vary depending on the decedent’s age. If the decedent was younger than 70½, you have two options:

1.     Take distributions within 5 years of the date of death - This can be all at once or over the 5 years.
2.     Take distributions over your lifetime – This is a great option if you don’t need the money now. You can take a required minimum distribution (RMD) based on your life expectancy.

If the decedent was over 70½, then you have the option to distribute the IRA over the longer of the life expectancy of the decedent or yourself. Because of this rule, a child or grandchild can stretch the IRA for quite a few years!

Inheriting an inherited IRA can be even more complicated. Consider this example. Father passes away, and the daughter inherits the IRA. She rolls it over into an inherited IRA and starts distributions over her lifetime. Then the daughter passes and her son becomes the beneficiary. Can the son stretch this IRA?

The answer is no. He can continue the schedule that his mother was on, or take it all out without penalty. IRAs can only be converted into Inherited IRAs once.

If you have questions about inheriting an IRA, give our office a call at (702) 870-7711 to make sure you have all the information you need.