As a trusted financial professional, you’ve worked with your clients throughout their careers to help them develop a comprehensive retirement savings strategy. This likely includes guidance on the full range of savings options, from company-sponsored plans like 401(k)s to personal accounts such as IRAs. Chances are the bulk of their savings are in these types of tax-deferred plans, which, for the time being, are free from income tax if they do not take withdrawals.
But as your clients approach their 70th birthday, it’s important they understand that they’ll soon be required to take withdrawals—required minimum distributions, or RMDs—from those funds on an annual basis (unless they are still working and their qualified plan from their employer doesn’t require distributions). They will be taxed on any part of their RMD which has not already been taxed.
But, what if they don’t need those RMDs for everyday living expenses?
According to the RMD Options Study* from Allianz Life Insurance Company of North America (Allianz Life), many people don’t foresee needing all of their RMDs for immediate use. While a majority (88 percent) of high-net-worth consumers ages 65-75 who were surveyed said they are familiar with RMD rules on tax-deferred retirement plans, a full 80 percent of these respondents believe they will not need all of their RMDs for day-to-day living expenses.
Furthermore, respondents reported being more interested in tax-deferred growth of their distributions and reducing taxes. The vast majority (95 percent) said it is very important to minimize their tax burden in retirement, yet nearly a third (32 percent) say they have difficulty understanding how RMDs could impact their overall tax obligation. Not surprisingly, 83 percent of consumers said they hate paying taxes on their RMDs that come out of most tax-deferred retirement plans, which are calculated as income tax.
Plus, many of the older consumers were interested in leaving a legacy. While half of the study respondents said they are interested in leaving a significant portion of their savings to beneficiaries, older consumers in the study (age 71-75) are even more likely (58 percent) to want to leave a legacy.
RMD Requirements
So, what exactly are RMDs and what are some of the requirements?
Required minimum distributions are mandatory withdrawals from many different types of qualified retirement savings vehicles, some of which include traditional IRAs, Simplified Employee Pension IRA plans, profit-sharing plans and defined benefit pension plans. RMDs are not required for Roth IRAs, nonqualified deferred compensations plans, nonqualified annuities and other nonqualified accounts.
Your clients are generally required to take their first RMD when they turn age 70½. They can delay their initial RMD payment until April 1 of the year following the year in which they turn 70½ or retire. For all subsequent years, their RMD is due by December 31 of the year. If they delay their first RMD between January and April 1 of the year following the year they turn age 70½ or retire, they would be taking two RMDs in the second year.