One of the pitfalls of using a tax-advantaged retirement account like a 401(k) or…

One of the downsides of using a tax-advantaged retirement account like a 401(k) or an IRA is that once you reach a certain age, you must start withdrawing a minimum amount of money each year – to prevent people from protecting tax money for too long. Some may wonder, however, if they can just reinvest that money immediately. The answer is yes, you can put the money you withdraw back into the market immediately within the required minimum distributions – as long as you don’t use another tax-efficient account. For more help with retirement investments, consider working with a financial advisor.

What is a minimum required distribution?

As the IRS says, “You can’t keep retirement funds in your account indefinitely.” The required minimum distribution solves this problem.

When you have a tax-advantaged retirement account, like a 401(k) or an IRA, the IRS requires you to start making withdrawals once you reach the maximum age. This age is:

• 72 years old if you reach or have reached 70 after June 1, 2019;

• 70.5 (i.e. six months after turning 70) if you turned 70 before June 1, 2019.

After that age, you must begin making what the IRS calls “Required Minimum Distributions” or RMDs. This is the minimum amount you must withdraw from your retirement account each year, otherwise you may face tax penalties. You can withdraw more than this amount if you wish, but you cannot withdraw less.

This is because your withdrawals are included in your taxable income. Tax-advantaged retirement accounts let you defer paying taxes on parts of your income until retirement, but the IRS would like to get that money eventually. Minimum distributions ensure that you will eventually start paying taxes on your retirement account. According to the IRS website, the required minimum distributions apply to the following accounts:

The story continues

Required minimum distributions do not apply to Roth IRAs. This is the only major tax-advantaged retirement account that is not subject to this requirement. You don’t have to pay taxes here because you’ve already paid taxes on the money you invested, so the IRS has nothing unpaid to collect from you.

What are the required minimum distributions?

Your required minimum distribution changes from household to household and from year to year. As the IRS describes: “The minimum required distribution for any year is the account balance at the end of the previous calendar year divided by a distribution period from the IRS Uniform Lifetime Table. A separate table is used if the sole beneficiary is the owner’s spouse who is 10 years or more younger than the owner.

It’s less complicated than it looks. Basically, you follow three steps:

• Find your account balance as of December 31 of the previous year;

• Find your applicable distribution factor, usually it is based on age and decreases as you get older; and

• Divide your account balance by your payout factor.

Here is the table to determine your distribution factor (remember that if you turned 70 after June 1, 2019, you do not have to take RMD until you are 72:

Minimum distributions required by the IRA Age Distribution period 70 27.4 71 26.5 72 25.7 77 22.9 76 22.3 79 19.5 88 18.7-121-17.8-121-12-23 – 14.8, 12) 12.8.8 92 10.2 93 9.6 94 9.1 95 8.6 96 8.1 97 7.7 100 6.3 101 5.9 102 4.9 105 4.5 106 4.2 109 3.4 110 3.1 111 2.9 112 2.6 113 2.4 114 2.1 115 and more than 1.9

So, for example, suppose you had $500,000 in your retirement account on December 31, and according to the Uniform Lifetime Table, you had a distribution factor of 25. You would divide $500,000 by 25 to get a minimum withdrawal of $20,000 in this schedule. year.

Remember that the required minimum distributions are calculated per account and per year. So if you have multiple retirement accounts, you need to calculate your required minimum distribution for each retirement account each year.

Can you reinvest your required minimum distribution?

You may reinvest your required minimum distribution in any account or asset that is not a tax-advantaged retirement account. So, for example, you can buy stocks, bonds, real estate or any other financial asset with your RMD. However, you cannot put this money into an IRA or 401(k). The exception to this rule is the Roth IRA. If you are eligible to put money into a Roth IRA, you can do so with the required minimum distribution money. (Generally, Roth IRAs are exempt from RMD rules.)

In other words, with the exception of Roth IRAs, as long as the IRS doesn’t give you tax relief on the portfolio, feel free to reinvest.

The essential

You can reinvest a required minimum distribution as long as you don’t put the money in a tax-advantaged retirement account. Other than that, you are free to do whatever you want.

Retirement Planning Tips

• Long before you can withdraw money from your retirement account, you need to start putting money into it. With SmartAsset’s Retirement Calculator, you can see how much money you’ll need to start saving for that perfect retirement… whenever you plan to take it. .

• A financial advisor can help you make decisions about your retirement savings and withdrawals. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

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