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 (required minimum distribution 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 accountor owns 5% or more of the business sponsoring the retirement plan, an RMD must be taken starting the year the individual turns 70½.
Most, but not all, retirement accounts are subject to the RMD rule. RMDs must be taken from traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. Also subject to the RMD are all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. Funds held in a Roth IRA are not subject to RMDs as long as the account holder is alive, but funds held in a Roth 401(k) account are subject to RMDs. If you have questions about whether a specific retirement account is subject to required minimum distributions, contact a tax professional.
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