5 RMD Rules Transcript

Hi, this is David Hovis, financial advisor with Hovis & Associates, and I’m here to talk to you today about Required Minimum Distributions, or RMDs.  RMDs are required distributions you have to take from retirement account like 401ks and IRAs, however they don’t apply to Roth IRAs.  So, there are 5 things you should know about RMDs. 

The first is at what age do you have to take your required minimum distribution.  The SECURE Act changed that age in 2020 from 70 ½ to age 72.   

The second thing you should know is the calculation.  How do they calculate your RMD?  Well the IRS calculates your RMD based on the account value from the previous year.  So, if you turned 72 in 2020 they’ll base your required minimum distribution on the account value of all your IRAs and retirement accounts on December 31, 2019.  The first year you take an RMD, the distribution will be about 3.5% of your account values from the previous December 31st, and then it goes up from there. 

The third thing you should know about RMDs is the taxes.  Your retirement accounts have never been taxed before.  That’s why you’re required to take a minimum distribution.  All the distributions out of your IRA accounts will be fully taxable and added to your taxable income for the year.  That’s why we at Hovis & Associates will encourage our clients to withhold taxes when we do their RMDs.  That way they’re not stuck with a big tax bill at the end of the year. 

The fourth thing you should know is the deadline.  When do you have to take your RMDs?  Generally speaking, you have to take your RMD by December 31st every year.  However, the first year the IRS gives you an extension and you can take your first distribution out by April 1st.  However, if you do that the first year, you’ll then have to take out two distributions in one tax year.  Therefore, we don’t encourage our clients to do that.  So, again, after that first year, you have to take it out, your required minimum distribution by December 31st every year.  If you fail to do that, then you will get to our fifth thing you should know 

Which is the penalties.  So, if you don’t take your required minimum distribution there will be a 50% penalty of what you should have taken out.  That’s right – 50%.  Therefore, at Hovis & Associates we always make sure our clients take their RMDs every year.  If you have any questions, feel free to give us a call and thanks for listening.