Military families face unique challenges when saving for retirement, but accumulating wealth is only half the picture. Whether you are just getting started with your career or already on the cusp of retirement, it is important to plan for the distribution of the funds you are accumulating.

The federal government provides some powerful incentives for retirement savings, including tax-deferral until you retire. As a member of the military, you can put off withdrawing money from your Thrift Savings Plan (TSP), as well as any traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and 457 plans you or your spouse may have. However, in exchange for tax-deferred growth, savers can be required to pay taxes on the money they withdraw in retirement — that is where Required Minimum Distributions (RMDs) come in.

What Is a Required Minimum Distribution (RMD)?

As the name implies, an RMD is the amount you are required to withdraw from your qualified retirement plans. The age at which RMDs from qualified plans (401(k), TSP, 403(b) and IRAs) must begin has recently changed from the year in which the investor turns age 70½ to 72. Note that this change applies to you only if you turn 70½ in 2020 or later. If you turned 70½ in 2019 or earlier, you must continue to take RMDs.

Given the severity of the tax penalties involved and the complexity of the rules governing RMDs, it is important to approach this subject with care. Making a mistake could have dire consequences for your wealth and your dreams of a happy retirement.

Mistake #1: Taking Distributions at the Wrong Time

The timing of your first RMD is essential, in terms of both financial planning and potential tax implications. Not taking an RMD on time is one of the most common, and most easily avoided, retirement planning mistakes.

You will need to take your first required minimum distribution no later than April 1 following the calendar year in which you turn 72. For subsequent years, you must take your RMD by December 31, so put that date on your calendar! The amount of your RMD will be determined by your age and the amount in the account — early RMDs may be only a small percentage of the account, but as time goes on the percentages will tend to increase.

Mistake #2: Calculating the Wrong Amount

Withdrawing the wrong amount is another common blunder. Your RMDs are calculated by taking your account balance as of the end of the previous year, divided by your life expectancy factor, as published in an IRS table. If your spouse is more than 10 years younger than you, you’ll need to use an alternate IRS table. If you are working with a Relationship Manager at AAFMAA Wealth Management & Trust, they can help you determine the RMD amount, based on the balances of all of your qualified accounts.

Mistake #3: Not optimizing your RMD strategy

If you have multiple IRAs in addition to your military Thrift Savings Account, you may think you have to take an RMD from each of those accounts, but that is not always the case. 

The IRS allows the holders of multiple IRA accounts to aggregate those accounts. As long as the RMD amount is correct, it does not matter which accounts you tap — if you want to pull the funds from a single account, you are free to do that. If you prefer to take a prorated amount from each account, you can do that as well.

Mistake #4: Not Being Tax-Smart When Donating Your RMD to Charity 

If you have more retirement income than you need, you may also consider helping your favorite charity. When planned correctly, you can avoid taxes on the funds you withdraw and the money you donate will help a worthy cause, giving you and your favorite charity a double benefit.

When donating your RMD from an IRA, you’ll want to use a qualified charitable distribution (QCDs). QCDs allow you to make a direct distribution to a charity that isn’t factored into adjusted gross income, thus lowering your tax bill. On the contrary, if you take the RMD and then write a check to your favorite charity, you will be taxed. You can choose to donate some or all of your RMD to charity. However, QCDs are limited to no more than $100,000 annually. 

RMDs are a part of life for holders of qualified retirement accounts, and dealing with them can be very complicated. As you approach age 72, understanding the best way to avoid the most common RMD mistakes is essential.

If you have questions or need assistance with required minimum distributions, we are here to help! Please reach out to our Relationship Managers at AAFMAA Wealth Management & Trust. We can walk you through the process, and rest assured, we will always keep your best interest in mind.

*Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice. Nothing contained in this communication should be interpreted as such. We encourage you to seek guidance from your tax or legal advisor. Past performance does not guarantee future results.

Resources:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets

https://www.kiplinger.com/article/retirement/T045-C001-S003-faqs-about-giving-your-rmd-to-charity.html

https://www.kiplinger.com/slideshow/retirement/T045-S001-10-rmd-mistakes-to-avoid/index.html

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

https://money.usnews.com/money/retirement/iras/articles/2017-12-04/how-to-donate-your-required-minimum-distribution-to-charity