Understanding Required Minimum Distributions (RMDs) at Age 73
As you approach the age of 73, it’s essential to understand the concept of Required Minimum Distributions (RMDs). This topic can often be a source of confusion, but grasping its basics is crucial for effective retirement planning.
What Are RMDs?
RMD stands for Required Minimum Distribution. It refers to the mandatory withdrawals you must start taking from certain retirement accounts once you reach the age of 73. These accounts include traditional IRAs, 401(k)s, 403(b)s, 457 plans, and other tax-deferred retirement savings plans. The government requires these distributions because you haven’t paid taxes on the funds in these accounts yet.
How Much Do You Need to Withdraw?
The amount you must withdraw is typically about 3.7% of your account balance as of the end of the previous year. For example, if you have a million dollars in your 401(k), you would need to withdraw approximately $37,000. This percentage can vary slightly based on IRS life expectancy tables, but 3.7% is a good general estimate.
Why Move from a 401(k) to an IRA?
Moving money from a 401(k) to an IRA before you start taking RMDs can be beneficial for several reasons:
- Investment Flexibility: IRAs offer a wider range of investment options compared to 401(k)s, allowing for better customization of your retirement portfolio.
- Fee Management: IRAs can potentially have lower fees compared to 401(k) plans, depending on the investments chosen and the custodians managing the accounts.
- Distribution Control: With multiple 401(k) accounts, you must take RMDs proportionally from each. However, with multiple IRAs, you can choose which account to withdraw from, providing more strategic control. This flexibility allows you to withdraw from safer investments and let other investments recover if they have taken a hit.
Strategic Withdrawal Planning
One significant advantage of using IRAs for RMDs is the ability to manage your withdrawals strategically. If you have investments that have underperformed, such as during a market downturn, you can avoid selling these at a loss by withdrawing from other investments within your IRA that have performed better. This level of control is not available with 401(k) accounts, where distributions must be taken proportionally from all investments.
Conclusion
Understanding RMDs and the benefits of rolling over 401(k) funds into an IRA is crucial for effective retirement planning. By doing so, you can gain greater control over your investments, potentially reduce fees, and strategically manage your withdrawals to maximize your retirement income. If you’re approaching 73, consider consulting with a financial advisor to explore your options and ensure you’re making the most of your retirement savings.
