Whether you’re preparing for retirement or already enjoying it, one thing remains true: You want to make the most of your income and protect it from unnecessary penalties. Sounds easier said than done, especially when required minimum distribution (RMD) rules change from time to time and both RMDs and withdrawal strategies have tax consequences. We’re here to help simplify important details:
RMDs are required minimum distributions investors must take every year from their retirement savings accounts, including traditional IRAs, and employer-sponsored plans such as 401(k)s, and Roth 401(k)s, starting at age 72.
Note: Roth IRAs aren’t subject to RMDs.
SET A REMINDER TO AVOID THE PENALTY
It’s very important to withdraw your RMD on an annual basis. If you forget, you’ll face a 50% penalty tax on any amount not withdrawn.
Last year, the RMD age increased from 70½ to 72 as a result of the Setting Every Community Up for Security Enhancement (SECURE) Act, and RMDs were waived by the CARES Act. The temporary waiver applied to:
There is no longer an RMD waiver for 2021. As a result, anyone age 72 or older as of December 31, 2021, must take their RMD by year-end to avoid the 50% penalty―unless this is their first RMD, in which case they have until April 1, 2022.
If you inherited an IRA, including a Roth IRA, you must take RMDs from the account. You won’t owe taxes on withdrawals from an inherited Roth IRA as long as the original owner held the account for at least 5 years. But you’ll owe taxes on withdrawals from an inherited traditional IRA.
The rules for how IRA beneficiaries must take RMDs depend on when the original account owner passed away and the type of beneficiary. For example:
Check out our inherited RMD calculation methods for more information.
RMDs are designed to spread out your retirement savings and related taxes over your lifetime. If you don’t depend on the money to satisfy your spending needs, you may want to consider:
Depending on the amount you’re required to take, the cost of missing an RMD can be pretty significant. To avoid a penalty, take the full amount each year. Otherwise, you’ll owe the IRS 50% of the shortfall.
Penalty for missing the entire distribution or a portion of it
|RMD amount||Amount distributed||Amount not distributed
(subject to the 50% penalty)
|50% IRS penalty tax|
Once you reach RMD age, we’ll automatically calculate your annual distribution amount for any traditional IRAs and Individual 401(k)s held at Vanguard. You’ll receive an annual statement in late January and can also find your calculation here. You can also enroll in our free and convenient RMD Service, which allows you to set up your RMDs to be automatically distributed each year. It’s a great way to make sure you never miss a distribution or find yourself subject to the 50% penalty.
Calculating RMD amounts can get a bit complicated, which is why we recommend leaving it to the experts. But here’s a high-level overview of how it works.
RMD amounts are determined by looking at the following factors:
For example, let’s say you’ll be age 75 as of December 31, 2021, and your life expectancy factor is 22.9. If the value of your IRA as of December 31, 2020, is $800,000, your RMD would be $34,934.50 ($800,000/22.9).
NEW LIFE EXPECTANCY CALCULATIONS COMING
A new IRS table will be used in 2022 with a larger life expectancy factor per age, which will result in smaller RMD amounts. This is good news because you’ll still have the flexibility to withdraw more if you need to, but you can also reap the benefit of having a larger account balance with the potential for continued growth.
When you’re over 59½ and in your pre-RMD years, you have the flexibility to annually revisit how to minimize your taxes―both now and in the future. For example, if you have a large balance in a tax-deferred account, like a traditional IRA or 401(k), and could face high RMDs in the future, you may benefit from:
Taxes matter, so work with a tax or financial professional. This is key because withdrawal strategies, including Social Security timing decisions, have tax consequences beyond RMDs
-Maria Bruno, head of Vanguard U.S. Wealth Planning Research, in a recent article.
All investing is subject to risk, including the possible loss of the money you invest.
We recommend that you consult a tax or financial advisor about your individual situation.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.
The services provided to clients who elect to receive ongoing advice will vary based upon the amount of assets in a portfolio. Please review the Form CRS and Vanguard Personal Advisor Services Brochure for important details about the service, including its asset-based service levels and fee breakpoints.