What are the required minimum distributions?

Required minimum distributions, or RMDs, are a key part of the retirement planning process. They are mandatory withdrawals from tax-deferred retirement accounts that investors must take after a certain age.

Your required minimum distribution amount is calculated based on your age and the value of your retirement account at the end of the year. The IRS provides life expectancy tables to help you calculate the amount you must withdraw each year.

A retirement account, such as an IRA or 401(k), is often an excellent choice for saving money tax-deferred. It can offer a wide variety of investment options, ranging from cash to stocks, bonds, and alternative investments.

But required minimum distributions (RMDs) can make these accounts less tax-advantageous. As a result, they may limit your flexibility.

Thankfully, IRAs have more advantages than disadvantages. And with careful planning, you can minimize your tax liabilities and preserve more assets for your heirs.

For example, an IRA owner can delay RMDs until the year they retire, or the spouse of an account holder can do the same. Spouses, minor children, and beneficiaries with a life expectancy of more than 10 years can also liquidate inherited IRA funds over time without a distribution penalty.

To calculate your RMD, divide the year-end value of your account by a distribution period that matches your age on December 31st of each year. This calculation is made using a table called the Uniform Lifetime Table.

If your spouse is a beneficiary of your IRA, the IRS uses a separate life expectancy table. This table allows the surviving spouse to withdraw a smaller amount each year, which can be more tax-efficient.

A 401(k) is a tax-advantaged savings account that allows employees to defer salary into an investment pool. Many companies match employee contributions, usually up to a certain percentage of their pay, and it can be a great perk to attract and retain top talent.

Most 401(k) plans offer an assortment of investment options to choose from, including mutual funds, stocks, bonds, and money market accounts. They may also have a target-date fund option that is designed to reduce the risk of investment losses as employees approach retirement.

In addition to allowing employees to save for retirement, 401(k)s offer some tax benefits, such as the ability to deduct contributions and earnings from current income taxes. However, once an employee reaches age 59 1/2 and starts withdrawing their money from the plan, they must begin taking required minimum distributions (RMDs), which are taxed at ordinary income tax rates.

RMDs for 401(k)s are determined by the IRS based on factors such as your life expectancy and whether you or your spouse have pre-1987 account balances. If you do not take your RMDs, the IRS can impose a financial penalty.

Required minimum distributions (RMDs) are the annual withdrawals from tax-advantaged retirement accounts like IRAs and 403(b)s that are required by law. Failure to take an RMD can result in a tax penalty of up to 50%.

If you're a public school employee working for a district or charter school, your employer may offer a 403(b) plan, which is similar to a 401(k) plan offered by private-sector employers. In most cases, you can make contributions to a 403(b) on a pre-tax basis.

Depending on your tax bracket and when you're planning to retire, a traditional 403(b) could be a better investment option than a Roth. However, a Roth 403(b) might be a good option if you think your tax bracket will be lower in retirement than it is now.

As with 401(k) plans, 403(b) plans are usually invested in mutual funds, which pool money together to invest in stocks, bonds, and other securities. While investing long-term can help your savings grow, there's always a risk of loss in the stock market. So make sure you do your research and find a reputable mutual fund to protect your hard-earned savings. Also, don't fall for products that promise low returns or high fees and surrender charges. Instead, invest in high-quality growth stocks.