As we get older, there's a lot to look forward to, such as retirement years with no job to go to and enjoying senior discounts. For example, those 62 and older can buy a lifetime pass to U.S. national parks for $80 -- or an annual one for $20.
One thing you might not be excited about is taking your required minimum distributions (RMDs) from retirement accounts once you turn 73. If so, know that they're not so bad as long as you know some important things about them.
Image source: Getty Images.
Here are six common RMD myths:
1. All retirement accounts have RMDs
Nope. False. Roth IRAs and Roth 401(k) accounts do not. But a traditional 401(k) or traditional IRA, as well as some other accounts, such as SEP IRAs, and SIMPLE IRAs, do require RMDs.
2. You must take each RMD from its own account
This is only partly true. You must take a RMD from each traditional 401(k) account you have. But with IRAs and 403(b) accounts, you can mix and match. So, for example, if you're due to take $1,000 from one IRA and $4,000 from another, you can take $5,000 from one of the IRAs. You simply need to be withdrawing that minimum amount in total.
3. It's OK if you're a little late taking your RMD
If you're not a type-A personality, you may have gone through life missing a few deadlines here and there and not suffering too much afterwards. You're likely to suffer, though, if you're late taking your RMDs.
However much you don't withdraw on time faces a penalty of up to 25%. So, for example, if you were supposed to withdraw $8,000 some years ago, you will likely be facing a $2,000 penalty. (Those who rectify such mistakes quickly may be granted a smaller penalty.)
So when is this important deadline? Well, you have until April 1 of the year after you turn 73 to take your first RMD. After that, the deadlines fall on Dec. 31. So your second RMD will be due no later than Dec. 31 of the year you turn 74.
It can be smart to take your first one in the year that you turn 73, so that you don't end up taking two RMDs in the year you turn 74, which can increase your taxable income for that year by a lot.
You might want to take your first RMD in the year you turn 73. Otherwise you face having to take both your first and second RMD in the same year, when you turn 74. That can boost your taxable income a lot for that year.
4. You're likely to forget your RMDs
Yes, it can indeed be easy to forget your RMD each year, so you'll need to set up a good reminder system. The best approach, arguably, is to simply automate the process. Lots of good brokerages will calculate your RMDs for you and let you set up automatic withdrawals. (I myself would still want to double-check each year that the withdrawal has been made, lest there be any glitch.)
5. RMDs can be combined if you're married
Don't assume that if you're married, you can take your RMD from one of your spouse's accounts. There are no joint retirement accounts; each person owes RMDs from that individual's own accounts. This does make sense, since RMDs factor your age into the calculations, and married couples are often not the same exact age.
6. Your RMDs will increase your tax bill
This is often true, but not always. You can circumvent taxation if you donate your RMD to charity, as long as you do so correctly in the eyes of the IRS. That means you would donate to a qualified charitable organization and do so directly from your retirement account to the charity, without your having taken possession of the sum as income.
If you donate some or all of your RMD, that can count as a tax deduction, which could actually reduce your tax bill instead of increasing it.
Take some time to learn more about RMDs -- and changes to them -- so you can make smart money moves.
