It is fairly common for people taking required minimum distributions out of retirement accounts, such as IRAs, to pull out more than the required amount, often without even being aware they are doing so, and triggering unnecessary taxes.
If you need the extra money and there’s no other investment or bank account to take withdrawals from, this would be fine.
However, in most cases where this occurs there are other non-retirement investment accounts or bank accounts where such withdrawals can be taken, while triggering far less, or sometimes, no taxes.
The easy way to verify if you’re taking more than your required minimum distribution is to simply call the institution where you have your IRA and ask them.
You can also verify it yourself, by going to the uniform lifetime table (or the joint life expectancy table if your spouse is more than 10 years younger) and getting what is called the “distribution period” number based on your age in the year of the tax return your looking at (see link below).
You would then divide the market value of your IRA on December 31st of the previous year by this number, and this will show your required minimum distribution for the year of the tax return you’re looking at.
Next you would look at line 4b on this return, which would show your taxable IRA withdrawals, so you could verify if you took more than the RMD amount.
If you’re taking required minimum distributions out of a company plan such as a 401-K, you would look on line 5b to see the taxable withdrawals.
But verifying RMDs on a company plan requires an extra step because line 5b combines withdrawals from the company plan, such as a 401K, with income from pension annuities.
You would need to first check your 1099s and separate out withdrawals from the company plan, from amounts coming out from pension annuity payments.
Once you verify the withdrawal amount from the company plan you can go to the uniform lifetime table (or the joint life expectancy table if your spouse is more than 10 years younger) and do the same calculation to see if you took more than the required minimum distribution. See, that wasn’t so bad right?
To give a simple illustration let’s say you’re filing as a single taxpayer, you must take RMDs from your IRA, and on line 4b, it shows you took taxable distributions of $28,000.
If your RMD amount was only $20,000, it means in this example, that you pulled out $8,000 more than was required. If you’re in a 24% tax bracket this cost, you $1,920 in taxes that was very likely unnecessary.
To remedy this, you would want to calculate your required minimum distribution for the current year and make sure, if possible, you take no more than this required amount.
And if you need additional funds, you could take it from a non-retirement account, if you have this option available. For example, pulling money out of a bank checking or savings account to cover extra expenses will normally trigger zero taxes.
And even if you liquidated part of a typical stock and bond portfolio in a non-retirement account to take needed funds above your RMD amount, the tax impact would be far less than taking fully taxable retirement plan withdrawals.
There’s an old saying that says “the little foxes spoil the vine”. Taking the time to check little things like the amount you’re taking in taxable IRA withdrawals may save you a few thousand in taxes.
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