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I have a 401(k) with $120,000 in it. I am 74 and receive the required minimum benefit at the end of each year. Do I need a retirement planner to help handle the withdrawal?
–Susan
While you don’t technically need a financial advisor to handle withdrawals from your retirement account, it can be helpful to talk to one. Between deciding which investments to liquidate, navigating potential tax implications, and ensuring you withdraw the right amount to meet your required minimum distribution (RMD), having a professional in your corner can help you make the most of from your pension money.
Do you have questions about retirement planning? Talk to a financial advisor today.
Required minimum distributions (RMDs) are the absolute minimum withdrawals that the U.S. tax code requires you to take from retirement accounts before taxes. These distributions must come from most types of accounts, including:
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Traditional IRAs
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401(k) plans
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403(b) plans
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457(b) plans
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SEP IRAs
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SIMPLE IRAs
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Rollover IRAs
Because you have not yet paid tax on this income, the tax authorities want to ensure that you do so. That’s why they force you to take distributions once you turn 73, regardless of whether you need the money or not.
There are strict rules about the timing and amount of these payments, with high fines if things go wrong. The IRS charges a hefty 25% on the amount not withdrawn on time, and that can put a big dent in your savings.
RMD calculations are based on the amount of money in your retirement accounts before taxes and your expected lifespan.
Start with the year-end balance of your retirement account from last year. Then look up the RMD factor that corresponds to your age in the appropriate IRS life expectancy table.
For example, imagine a retiree Cameron with $150,000 in IRA on December 31, 2022. Since Cameron will be 74 years old in 2023 and his situation fits into the Uniform Lifetime Table (the table most people use to calculate their RMDs), his situation The RMD factor would be 25.5. To calculate his RMD, he then divides his $150,000 balance by a factor of 25.5. That equates to an RMD of $5,882.35 for 2023.
You do not have to pay the RMD all at once; you can split these into a series of payments over the year if that’s easier for you. You can also take more than your RMD if necessary. This is just the minimum withdrawal you need to make. (And if you’d like to discuss your RMD calculations with a professional, contact a financial advisor.)
Many people have multiple retirement accounts, and that affects their RMD calculations. Technically, you need to calculate separate RMDs for each of your retirement accounts. But you can take one large, summarized RMD from each of the accounts if that’s easier for you. For example, if you have five IRAs, each with an RMD of $2,000, you can withdraw $10,000 from just one of those accounts or some other combination, as long as you reach the total of $10,000.
There is an exception to these aggregation rules: If you have more than one 401(k), you must take separate RMDs from each.
There is another special rule for workplace plans. If you are still working and don’t own more than 5% of the company you work for, you don’t have to take any RMDs from that company’s plan until you stop working.
Meanwhile, if you’re married, you and your spouse must each take your RMDs from your own separate accounts, even if you file a joint tax return.
Taking an RMD is not as simple as withdrawing money from a savings account. Because most people’s retirement accounts are invested, you will likely have to sell or liquidate investments to convert them into cash. Then working with an advisor can come in handy. (And if you need help finding an advisor, consider using SmartAsset’s free advisor matching tool.)
RMDs increase your taxable income, so they also increase your tax bill. That can lead to a pesky balance due when you file your annual tax return if you haven’t made federal or state tax payments.
Additionally, RMDs increase your adjusted gross income (AGI), a tax number used to determine other aspects of your taxable income. For example, AGI affects your ability to take advantage of certain tax credits or deductions. In most cases, RMDs will increase your tax bill. To avoid IRS penalties, you may need to make estimated tax payments or have taxes withheld from your distributions.
Reducing the amount you need to withdraw in RMDs will lower your AGI, your taxable income, and your overall tax bill. (And talking to a financial advisor can help answer any questions you may have.)
Figuring out the right RMD of each retirement account is just your starting point. From there, you need to consider a number of things, including:
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Which retirement account should the RMDs be taken from?
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What securities need to be liquidated to make the withdrawals
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Whether you should make a qualified charitable distribution (QCD) to avoid taxes on your RMD
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How much money you need to withdraw from your retirement accounts to live the way you want
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Whether it makes sense to automate withdrawals from your retirement account
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How much tax (if any) should be withheld from your benefits
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Whether your beneficiary designations are set up correctly
That’s a lot to navigate alone, which is why it often makes sense to work with a financial advisor. They can help you ensure you get the most out of your retirement savings and don’t lose more than you need to in taxes. (And if you need help finding a financial advisor, consider finding one with SmartAsset’s tool.)
Calculating your RMDs is relatively simple, but there is much more to effectively managing these mandatory withdrawals, including which investments to sell and the tax impact of these transactions. While you may not need a financial advisor to do all this for you, it’s a good idea to at least talk to someone before you start receiving benefits.
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Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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There is a lot to consider when hiring a financial advisor. You should consider the services they offer, how much they cost, and their login credentials, to name a few. That is why we have put together a comprehensive guide to finding and choosing a financial advisor.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Michele Cagan, CPAis a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Michele is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and she received compensation for this article. Some reader-submitted questions have been edited for clarity or brevity.
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The post Ask an Advisor: I’m 74 with $120,000 in my 401(k). Should I hire a financial planner to help with RMDs? first appeared on SmartReads by SmartAsset.
