How Are Required Minimum Distributions (RMDs) Taxed?

Hudson, NH Resident Plans for the Future

Retirement income is not immune to taxes.  Taxes on required minimum distributions, including traditional IRAs and 401(k)s, are taxed on their gains and their pre-tax deductible contributions.  However, because retirement is likely lower than when the individual was working this is typically taxed at a lower rate.  The tax rate applied to this income is determined by the income of the recipient when the money is taken out.  For the most recent tax year, this tax rate was capped at 37%.

A Hudson resident was looking toward retirement in the future.  Wanting to prevent any unexpected surprises, he had questions about how required minimum distributions would be taxed.

Ways to Reduce the Amount of Taxes Paid on RMDs

Beginning at age 72, you are required to start withdrawing funds from tax-advantaged retirement funds.  One exception is Roth IRAs, which do not have RMDs.  If you are continuing to work beyond age 72 and do not own the business, you can avoid taking RMDs from your current employer’s 401(k) until you retire from the company.  Owners of Roth 401(k) accounts can roll the money into a Roth IRA, eliminating the requirement to take RMDs.  Savings that is in a traditional IRA can be converted to a Roth IRA.  You will be taxed at the time of the conversion at your normal tax rate.  But once the money is placed in a Roth IRA, there are no required minimum distributions in place.

Another option for reducing taxes when taking RMDs is to donate the money to a qualified charitable organization.  Up to $100,000 can be transferred directly from a retirement savings account to a charity each year.

IRS Penalties for Not Taking Required Minimum Distributions

If you miss the deadline for taking your required minimum distribution, you could be hit with a hefty penalty from the IRS.  This could be as much as 50% of the amount of money that should have been taken but was not withdrawn.  For this reason, it is important that you take required minimum distributions as your age and the type of retirement account requires.

The Hudson resident now has a better of understanding of what he can expect when taking required minimum distributions when he reaches the required age.