RMDs — Required Maximum Destruction!
I know — RMDs don’t actually stand for that. They stand for Required Minimum Distributions. Many over age 70 ½ know what they are — it’s when the IRS requires you to take a withdrawal from your IRA accounts then are taxed on it.
RMDs are calculated by dividing the total balance of your IRAs, employer sponsored plans (401k, 403b, etc.), and IRA based plans (SEP, Simple IRA, etc.) at the end of the previous year by the distribution period that correlates with your current age. The distribution periods are based on the IRA’s RMD Uniform Lifetime Table. Your required minimum distribution changes according to your age and your account balance.
Sounds simple enough, right? But let’s consider this scenario. Let’s say, hypothetically, you’re 70 ½, the typical RMD start age, and your IRA closing value on December 31, 2014 was $100,000.
Fast forward 12 months. It’s now December 2015 and you have to take your RMD before the end of the year. Here’s the possible calculation:
After dividing your account by 27.4 (the distribution period associated with age 70 on the IRS table), your RMD is 3.65%. That 3.65% RMD withdrawal rate multiplied by your $100,000 IRA value at the end of 2014 equals a $3,650 RMD amount, so you withdraw $3,650 to satisfy your RMD for that year.
Now, here’s the really BIG problem if you were invested in the market. Between the end of 2014 and now, the S&P 500 is down around 10%. Which means when you take that $3,650 withdrawal, your IRA isn’t worth $100,000, it’s only worth $90,000.
Then after you subtract your $3,650 RMD, your IRA is only worth $86,350. The effect is the same as if you took a $13,650 RMD!!
That’s what I meant when I called it Required Maximum Destruction. How many years like that can your IRA survive and still provide you the income you need in retirement?
If you would like to learn more about Sam Liang or Rubino & Liang LLC., visit our website http://rubinoandliang.com or call our office (617) 630-8787.
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