One critical aspect of a long-term retirement plan that you need to consider is required minimum distributions (RMDs). As you save and invest for your retirement, it's necessary to plan for how you will withdraw money from your retirement accounts such as 401(k)s and IRA accounts. In this article, we'll discuss what RMDs are, why you need to know about them, and how to prepare for them.
What are Required Minimum Distributions (RMDs)?
Required minimum distributions are the minimum amount of money that you are required to withdraw from your retirement accounts each year after you turn 72 years old. RMDs apply to tax-deferred retirement accounts such as traditional IRAs, 401(k)s, 403(b)s, and other defined contribution plans.
Calculating Your RMDs
The amount you must withdraw each year depends on your age and the value of your retirement accounts. The IRS provides tables that offer a guide to calculate RMDs based on average life expectancy. The formula is: RMD = (Account Balance ÷ Distribution Period).
Preparing for RMDs
There are several strategies you can employ to prepare for RMDs. One of the essential steps is to have a comprehensive retirement plan. This plan should outline how you intend to withdraw funds from your retirement accounts, including RMDs. You can work with a financial advisor to develop the retirement plan that suits your individual needs.
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