Living in Retirement
Required minimum distribution basics
March 20, 2014
Colin Kelton: Age certainly is a factor when it comes to withdrawal strategies, as you mentioned, and you mentioned RMDs, and we had a question from Rhonda who asked a bit about RMDs. Can we describe them just a little bit more, what exactly does that stand for? and Rhonda, I'll add to your question, Can Vanguard help?
Maria Bruno: RMDs are required minimum distributions from tax-deferred accounts, either 401(k)s or IRAs. So these are deferred vehicles. Typically, individuals make contributions. They may get a tax deduction on the contributions, but essentially the earnings are all deferred until retirement.
You can take the money—you can always access the money prior to age 70½, it's just whether you may be subject to taxes or penalty. But at age 70½ you're mandated by the IRS to actually take distributions. So the IRS provides a table and, basically, they give us factors, and then those factors are applied to the portfolio balances.
Once you reach 70½, you have to take the distribution. Now, they do give a little bit of leeway in the first year. So you're required to take the distribution by April 1 of the year following when you reach 70½, and then, consequently, it's on an annual basis. So the first year it could potentially defer, but you have to take the two. So, essentially, you take the factor, apply it to the prior year-end balance, and there's your RMD. And in most situations that will be fully taxable.
We do provide a complimentary RMD service, so for our clients there's a couple of things. One is it's very easy to fill out. We can do the calculation and, better yet, we can set up an automatic service where you can actually get that distribution and channel it to either a nonretirement account or to a bank account.
Colin Kelton: We have a question from Mary, who's actually right here in Downingtown. And she asked, "I don't need the RMD money now. What should I do with it?" So I have to take this money out, I'm over 70½, but now what do I do with it?
Colleen Jaconetti: We would say, "Mary, if you don't need the RMD, you can actually reinvest the RMD in a taxable account," and we would say to try and do it in a tax-efficient manner. Maybe put it in an index equity fund—broad-based index equity fund—or something like that, or look to use the RMD to rebalance the portfolio. So if at some point you're looking at your portfolio and it's out of whack, you may want to channel the RMD to the most underweight asset class.
Colin Kelton: Don't spend it. Reinvest if you don't need the money. Keep it working for you.
Colleen Jaconetti: Absolutely.
Maria Bruno: Right, there's nothing that prohibits you from reinvesting the proceeds. You just can't put it into another deferred account.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.
© 2014 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
Learn about RMDs and what they mean for you
Age 70½ means the beginning of taking your RMD but not the end of your investment planning. Vanguard retirement planning experts Colleen Jaconetti and Maria Bruno define RMDs and discuss some creative ways to reinvest them that can keep your money working for you.
Other excerpts from this webcast:
- The 4% rule and a dynamic retirement spending plan
- Tax-savvy withdrawals in retirement
- Annuities and your retirement portfolio
- The biggest mistake people make with their retirement portfolio
- All investing is subject to risk, including the possible loss of the money you invest.
- For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
- When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
- This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.