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What is a Required Minimum Distribution (RMD)?

I get asked this question a lot. Many of us are unaware of a required minimum distribution (RMD). If you know what an RMD is, you usually aren't sure what that means for you. An RMD requires at age 70 1/2 (if you are born later, RMD is at age 72), you take money out of your retirement accounts.

The minimum amount you take out depends on two things - your age and the amount in these accounts at the prior year's calendar end. Most places where you hold your account will tell you during the first quarter of the current calendar year what your RMD amount is.

Good news for some - the government now says that if you were born after June 30, 1949, then you have until age 72 to take out the money.

So what is the issue then?

I have noticed that as you age, you may not want to take out the required amount. Mainly, you will pay more in taxes, and you may not need to use that money; this is the great equalizer. The IRS doesn't care how much money you need. They only care that you have reached the age that you must take out funds and pay taxes. And the higher the balance in those accounts - the higher your taxes.

So what should you do?

For one, be aware and understand the consequences. Then work with your financial advisor (or contact me) to discuss when it is beneficial to add to a ROTH vs. a traditional retirement account. When to stop funding and maybe pay taxes as you go and the reasons for each may be.

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