Determining When to Switch to the RMD
The decision as to how much to withdraw from a retirement portfolio is complicated not only by longevity risk, but also by tax issues. The commonly cited 4% withdrawal rate can be trumped by the Internal Revenue Service’s (IRS) required minimum distribution (RMD) rules for retirement plan accounts. Determining which withdrawal rate to use requires an understanding of the RMD rules and a calculator.
The Required Minimum Distribution
An RMD is the annual minimum amount a retirement plan account owner must withdraw beginning in the year he reaches 70½. An individual can delay the RMD if he retires after age 70½. However, if an individual holds an individual retirement account (IRA) or owns 5% or more of the business sponsoring the retirement plan, an RMD must be taken starting the year the individual turns 70½.
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