RMDs are distributions that people aged 72 or older must take from their retirement accounts each year as mandated by the government. When you withdraw money from a tax-deferred retirement account, that money counts as taxable income. So, after decades of having been safely tucked away in a tax-deferred account, the money becomes taxable, and the government gets to take its cut.
RMDs can be taken anytime during the calendar year. At Artemis, we tend to take RMDs for our clients towards the very end of the year. Doing so provides for a bit of extra tax-deferred compounding. If taking this approach, just be careful not to forget and miss the year-end deadline. If you don’t take your RMD before December 31st each year, it results in a penalty equivalent to 50% of the amount you should have taken but didn’t. It’s one of the harshest IRS penalties I’m aware of.
Some people complain that RMDs are too high as a percentage of the overall account balance and could therefore potentially deplete the retirement account well before death. Rest assured that this complaint is unfounded for several reasons.
1) RMDs are based on the prior year-end account balance, so it automatically recalibrates as the balance drops.
2) RMDs start at a comfortable 3.6% of the account balance and gradually ramp up to 5.3% at age 80 and 6.8% at age 85.
3) The actuarial table (called the Uniform Lifetime Table) that determine these percentages are based on the retiree’s life expectance PLUS 10 years. For example, for a 70-year-old, the distribution period on the Uniform Lifetime Table is 27 years, and for an 80-year-old is it 19 years. This is much longer than normal life expectancy.
In 2019, the age for RMD was raised from 70.5 to 72 via the SECURE Act. Already, another bill, dubbed SECURE Act 2.0, could pass later this year which would raise the RMD age to 75 over the coming decade. Of course, none of this matters for the 80% of Americans who withdraw more than the RMD amount in the first place…for the other 20%, it provides a few extra years to strategize on how to minimize RMD-related taxes!