Saving for retirement is a financial consideration for people of all ages. And if you're able to get a decent amount in your retirement funds before turning 65, it can provide a lot of peace of mind. The peace of mind those funds bring can be big enough that some older adults don't want to take out too much too early; they would rather know the money is there if they need it.
Unfortunately, you can't sit on your nest egg forever without taking some of the money out. When you put money in certain types of retirement funds, you didn't pay taxes on that income. The IRS is willing to wait to tax you, but it doesn't want to wait forever. To that end, it establishes some rules about how much you have to take out of qualified retirement funds and when. Find out more below.
Required minimum distributions refer to the minimum amount each calendar year you must take out of your retirement plans. You can take out more than the minimum, but once you reach a certain age, you must take at least the minimum.
These rules apply to certain types of qualified retirement plans. Typically, these only apply for retirement plans that involved tax-deferred funding. You have to worry about required minimum distribution if you have any of the following:
You don't have to start taking these distributions as soon as you retire, which can provide some leeway in how you use your retirement funds. For individuals who were born after June 30, 1949, the age when minimum distribution requirements begin is 72.
If you have money in IRAs, you have to start taking distributions on April 1 after the year you turn 72. So, for example:
If you have money in other plan types on the list above, minimum distribution requirements typically start on April 1 the year after you turn 72. However, some plans have requirements that start April 1 the year after you retire. Make sure to read all the fine print and consult a financial expert or retirement tax expert so you know exactly when your required minimum distributions start.
For individuals who were born before June 30, 1949, the age that governs when required distributions start is 70 1/2. That's six months after you turn 70. In this case, the required distributions start on April 1 after you turn 70 1/2.
The tax consequences of not taking the minimum required distribution can be steep. You could end up paying a 50% excise tax on any amount that was supposed to be distributed but was not.
For example, if you were required to take $20,000 in minimum distributions in 2021 and you only took $10,000, you could owe $5,000 in a penalty tax on the remaining $10,000.
How much you have to take each year in required minimum distributions depends on how much you're holding in your accounts and how old you are. Whether your spouse is your only beneficiary and their age can also play a role in this calculation.
The IRS provides worksheets to help you figure out what your required minimum distributions are. You may receive this worksheet from your retirement plan provider too. If you aren't sure about how much to take out or find the worksheet complicated, consider consulting a tax professional. It's better to pay a bit to get some expert advice than to be on the hook for a huge tax bill because you didn't take the right distributions.
Ultimately, most older adults look to balance how much they take out of their retirement accounts with their necessary annual expenses. Moving into an assisted living apartment such as those at Bethesda Gardens in Loveland can make this easier to do. Residents of our assisted living community have fixed expenses that cover the cost of their apartment and numerous amenities, including meals, housekeeping, laundry, and wellness services.
Choosing a lifestyle with fixed expenses that supports plenty of activity and enjoyment helps you know exactly how much to take out of your retirement accounts each year. It also helps you plan long-term to best manage your retirement funds while supporting your own health and wellness.