Contributions to your Thrift Savings Plan (TSP) or other tax-advantaged retirement accounts are made with pre-tax dollars, meaning they haven’t been taxed by the federal government. Eventually, the IRS requires you to withdraw funds from these accounts to collect its share. These withdrawals are known as Required Minimum Distributions (RMDs).
When Do RMDs Start?
RMDs begin at age 73. For the first year, you have until April 1 of the following year to take your initial RMD. In subsequent years, you must withdraw by December 31 annually. Failing to take an RMD incurs a penalty of up to 25% of the amount you were required to withdraw.
How Are RMDs Determined?
To calculate your RMD, take your account balance as of December 31 of the prior year and divide it by the life expectancy factor from the IRS’s Uniform Lifetime Table. For instance, if you’re 75, your spouse is less than 10 years younger, and your account balance is $500,000, the IRS factor is 24.6. Dividing $500,000 by 24.6 gives an RMD of approximately $20,325.
Options to Manage RMDs
If you have sufficient savings, don’t need RMD funds, and want to reduce taxes, consider a Qualified Charitable Distribution (QCD). This lets you transfer your RMD directly to a charity, excluding it from your taxable income. Alternatively, converting funds to a Roth account is an option. While the conversion is taxable, Roth accounts are exempt from RMDs, allowing tax-free growth and, under certain conditions, tax-free withdrawals.
Crafting a Withdrawal Plan
Some retirees adopt overly cautious withdrawal strategies to avoid outliving their savings, but this may limit enjoyment during their most active retirement years. Withdrawing funds might feel like depleting your accounts, but a modest 4% to 5% annual return can often restore your balance to its pre-withdrawal level.
Plan Ahead
The ideal time to prepare for retirement is now. A solid retirement plan goes beyond finances; it reflects your envisioned lifestyle and goals. Contact a Federal Retirement Consultant (FRC®), who can align a strategy with your aspirations for a fulfilling retirement.
