It is fairly common for people taking required minimum distributions out of retirement accounts, such as IRAs, to pull out more than the required amount, often without even being aware they are doing so — triggering unnecessary taxes. Because retirees are often using retirement accounts for income, it’s very common for them to contact a well-meaning employee at their financial institution and tell them to set them up to get monthly income from their IRA that may be more than their RMD amount.
For some people who have a carefully crafted broad tax strategy, it may make sense to pull out more than the minimum RMD (please see Should You Take an Extra Big RMD This Year? (opens in new tab)). But others aren’t being as thoughtful about their decision. If you need the extra money and there’s no other investment or bank account to take withdrawals from, this would be fine. However, in most cases where this occurs there are other non-retirement investment accounts or bank accounts where such withdrawals can be taken, while triggering far less in taxes, or sometimes no taxes at all.
How Can You Find Your RMD Amount?
To avoid getting hit with unnecessary taxes, you need to have a firm understanding of what your required minimum distribution should be. The easy way to verify whether you’re taking more than your required minimum distribution is to simply call the institution where you have your IRA and ask them, “How much in withdrawals did I take from my IRA in 2020? How much was I actually required to take? And what should my RMD be for 2021?”
You can also verify your RMD by doing the calculation yourself. You could try a simple online calculator, such as Kiplinger’s RMD calculator. Or you could do it manually, too. To get started, go to the uniform lifetime table (or the joint life expectancy table if your spouse is more than 10 years younger) at the IRS website (opens in new tab) and locate what is called your “distribution period” number, based on your age in the year of the RMD you’re calculating. You would then divide the market value of your IRA on December 31 of the previous year by this number, and this will show your required minimum distribution.
For example, say Joe is concerned he may have taken a bigger RMD from his IRA last year than he needed to. In 2020 he was 75 and his wife was 72. He would check the balance of his IRA at the end of 2019 — say it’s $458,000 — and then divide that number by 22.9 (from the IRS uniform lifetime table). His RMD would be $20,000.
Next, Joe would grab his 2020 tax return and look at line 4b, which would show his taxable IRA withdrawals, so he could verify whether you took more than the RMD amount.
It’s a little different if you’re taking required minimum distributions out of a company plan, such as a 401(k). You would look on line 5b to see the taxable withdrawals. But verifying RMDs on a company plan requires an extra step, because line 5b combines withdrawals from the company plan, such as a 401(k), with income from pension annuities. You would need to first check your 1099s and separate out withdrawals from the company plan, from amounts coming out from pension annuity payments. Once you verify the withdrawal amount from the company plan you can go to the uniform lifetime table (or the joint life expectancy table if your spouse is more than 10 years younger) and do the same calculation to see if you took more than the required minimum distribution.
How Much Could Your Mistake Costing You?
Let’s go back to Joe. His RMD for 2020 should have been $20,000. He looks on line 4b of his 2020 tax return, and it shows he took taxable distributions of $28,000 that year. This means he pulled out $8,000 more than was required. If Joe was in a 24% tax bracket, this cost him $1,920 in taxes that was very likely unnecessary.
To remedy this yourself, you would want to calculate your required minimum distribution for the current year and make sure, if at all possible, you take no more than this required amount.
Where to Pull the Money from Instead of Your Retirement Account
If you need additional funds beyond your RMD amount, you could avoid paying unnecessary taxes if you take a moment and think about all the different accounts you have available to you besides your IRA. You could take the extra funds from a non-retirement account, if you have this option available. For example, pulling money out of a bank checking or savings account to cover extra expenses will normally trigger zero taxes.
And even if you liquidated part of a typical stock and bond portfolio in a non-retirement account to take needed funds above your RMD amount, because you’d be dealing with more advantageous capital gains taxes, the tax impact would be far less than taking fully taxable retirement plan withdrawals.
There’s an old saying that says “the little foxes spoil the vine.” Taking the time to check little things like the amount you’re taking in taxable IRA withdrawals may save you a few thousand in taxes.
Kiplinger’s Real Estate Forecast: Home-Price Growth Set to Slow Down
Economic Forecasts Kiplinger’s latest forecast on housing starts and home sales.
By Rodrigo Sermeño • Published
Tesla Deliveries Miss Estimates. Is the EV Market at Risk?
Third-quarter deliveries for Tesla came in lower than analysts were expecting, but the company is still in solid shape heading into Q4.
By Will Ashworth • Published
Best Way to Exit Your Timeshare: Never Buy One in the First Place
Beware: There is a war on timeshare owners who just want to get out!
By H. Dennis Beaver, Esq. • Published
Year-End Financial Checklist: Prepare Now, and You’ll Have Time to Adjust
The sooner you figure out where you’re at, the sooner you can jump on making changes without stressing later.
By Julie Virta, CFP®, CFA, CTFA • Published
Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents’
Doing some ‘upstream’ planning now will take the guesswork out of what’s coming your way.
By David Handler, J.D. • Published
Investing Portfolio Peace of Mind, Now and in Retirement
The stock market soars, and then it takes a nosedive. When it does, remember: Disciplined investors will do best.
By Janie Kelly, RICP • Published
How Young People Can Own Their Financial Future Authentically
It starts with trusting the process. The good news is Gen Zers and younger Millennials are on their way, a new study says.
By Margaret Franklin, CFA • Published
No Grinch Allowed! Inflation-Beating Tips for the Holidays
To make the most of your holiday season in these inflationary times, start planning NOW.
By Andrew Rosen, CFP®, CEP • Published
3 Top Challenges Female Entrepreneurs Face When Starting a Small Business
Inherent biases make it harder for women to get funding than men, and many women start later in life and juggle family commitments.
By Ali Swart, CFP®, MBA • Published
ADA Violation or Just Bad Business? Honey, I Shrunk the Menu!
When a chain restaurant introduced a new menu with teeny-tiny print, customers were not happy. But was it illegal?
By H. Dennis Beaver, Esq. • Last updated