6 ways to manage your retirement account distributions

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Withdraw now or wait till later? How much should you take? How should you handle Required Minimum Distributions (RMDs)? We provide some helpful insights. Of course, every financial situation is unique, so consult with a tax and/or legal advisor to get help before making any decisions regarding distributions, as distributions may impact your taxes.

Key points

  • Generally, beginning the year you turn 72, you must withdraw an IRS-required minimum distribution (RMD) from your qualified retirement plan accounts each year, though this is not necessary with a Roth IRA
  • The first RMD payment can be delayed until Apr. 1 of the year following the year you turn 72Footnote 1
  • If you wait until Apr. 1 of the year after you turn 72 to take your first RMD, you also will have to take another distribution by Dec. 31 of that year, and pay income tax on both distributions
  • To help make your money last, try to avoid taking out more than the required minimum
  • Consider using our RMD Service to help you consider how best to take your distributions
  • If you're still working, you may not have to take RMDs from your employer's qualified retirement plan, such as a 401(k) plan
All the money you've been putting away toward retirement — are you aware that you can't necessarily keep it all in your retirement accounts until you're ready to begin drawing on it? You're obligated to begin withdrawals from your IRAs and other qualified retirement plans once you turn 72. Calculating these required minimum distributions (RMDs) can be tricky, especially if you have several retirement accounts. And you may be subject to a 50% additional federal tax on the amount of missed or insufficient RMDs. But if you get your RMDs right, you'll avoid problems while helping to make the most of your retirement assets. Be sure to consult your tax professional about these and any moves that can trigger taxes. Here are six tips to ease the task.
One of the biggest mistakes people make with RMDs is thinking they know how much they need to withdraw.
— Kyle Schlaich,
division manager, Advisory Center, Merrill

Tip 1: Use the calendar to your advantage

"The biggest mistake people make with RMDs is thinking they know how much to withdraw," says Kyle Schlaich, a division manager in Merrill's Advisory Center™. You generally can start taking withdrawals from an IRA or other qualified retirement plans as soon as you turn 59½ without incurring a 10% additional federal tax for early withdrawals. But waiting longer could mean a larger nest egg to draw upon. If you turned 72 in 2020, you would ordinarily need to take your first distribution by Apr. 1, 2021. Due to the CARES Act, 2020 RMDs are waived, so you would not be required to take two RMDs in 2021 if 2020 was the year you turned 72. However, once you begin taking RMDs, you are required to take an RMD every year. If you are still working at age 72 and you do not own 5% or more of the company you work for, you may not have to take RMDs from your qualified retirement plan until Apr. 1 after the year you retire.
"You should check with your tax advisor, as there are cases where delaying the first RMD may make sense," says Debra Greenberg, director, Retirement and Personal Wealth Solutions, Bank of America. "For example, if you're still working and you plan to retire, you may expect to be in a lower tax bracket the following year."

Tip 2: Stick to the minimum if possible

Generally, your age and your account values determine what you are required to withdraw. While you can take out more than required, that's generally not a good idea unless you need the extra income. For one thing, you'll pay income tax on any withdrawals, and you'll sacrifice potential future tax-deferred growth of those funds. "If you need to supplement your distributions, consider taking that money from an after-tax brokerage account or a savings account," says Schlaich.

Tip 3: Consider all your retirement accounts

If you have multiple traditional IRAs and qualified retirement plan accounts with former employers, you must calculate your required distribution for each account. You don't have to withdraw from every traditional IRA, however, as long as the money you take from one or more accounts meets the overall required distribution. But you do need to withdraw the RMD from each qualified retirement plan.
Keeping track of everything can be cumbersome and confusing. To simplify matters, many people elect to roll over multiple old qualified retirement plan accounts into a single IRA or to consolidate multiple IRAs into one account.
You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to a traditional IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. For more information on rolling over your IRA, 401(k), 403(b) or SEP IRA, visit our rollover page or call a Merrill rollover specialist at 888.637.3343.

Tip 4: Sometimes you should keep your qualified retirement plan account intact

If you are still working at 72, are contributing to the company's qualified retirement plan and own less than 5% of the company, the government doesn't impose RMDs from that specific qualified retirement plan until the year after you retire (though you must still take distributions from your IRAs). In that case, you may want to wait until you retire to roll over your qualified retirement plan funds to your IRA.

Tip 5: Try our RMD Service

At Merrill, we offer a service that helps you calculate distributions on your Merrill retirement accounts. This helps you take a distribution on time, to avoid additional federal taxes for not taking the minimum necessary. It also helps keep your estimated cash needs on track. Call or locate a Merrill Financial Solutions Advisor near you to discuss how to manage RMDs with this service. You also can discuss how to use an enhancement to the RMD service, the Automatic Liquidation Service, which lets clients specify which mutual funds in their retirement accounts can be sold to fund their RMDs. "Because of the rule of aggregating IRAs for distribution purposes, it is important for clients with more than one IRA to have a detailed discussion about which IRA or IRAs will be liquidated," Schlaich explains.

Tip 6: Don't guess — calculate each year

Don't assume your RMD withdrawal amount is set. It will vary from year to year, depending on the value of your retirement accounts and your age, Schlaich says. "Talk to a Merrill Financial Solutions Advisor and tax professional to help you determine your cash flow needs and whether your RMD is enough to meet them."
Next steps

Footnote 1 If you wait until Apr. 1 of the year after you turn 72 to take your first RMD, you also will have to take another distribution by Dec. 31 of that year, and pay income tax on both distributions. This wouldn't apply to 2020 RMDs, as 2020 RMDs were waived by the CARES Act.

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