What are Required Minimum Distributions?
As a small business owner, you may have a retirement account such as a traditional 401(k), an individual retirement account (IRA), a SEP IRA or a solo 401(k), that all have RMDs . These accounts are designed to help you save for retirement and offer tax benefits to encourage you to do so. However, once you reach age 73, you will be required to take minimum distributions from these accounts.
What is the Required Minimum Distribution Rule?
The required minimum distribution (RMD) is the minimum amount that you must withdraw from your retirement account each year. The RMD for traditional 401(k)s and IRAs is generally calculated based on your age and the prior year-end balance in your account. For example, if you are age 73 or older, your RMD for 2023 will be calculated based on the year-end balance of your retirement account for December of 2022. The RMD for IRAs is calculated using this prior year end value and IRS tables.
What happens if I miss my RMD for the year?
As a small business owner, you may have other retirement plans, such as a SEP IRA or a solo 401(k), that also have RMDs. It's important to understand the RMD rules for each of your retirement accounts to ensure that you are taking the required distributions and avoiding any potential penalties. If you are subject to taking a RMD for the year and you fail to do so; there is a 50% penalty on the amount that is not withdrawn. This is a severe penalty!
Will Required Minimum Distributions affect my taxes?
Yes, they can. One important consideration for small business owners is that RMDs may affect your taxes. The amount you withdraw from your retirement account as an RMD is considered taxable income. This means that you may owe taxes on the money you withdraw, depending on your tax bracket and other factors.
Are there exceptions to taking the Required Minimum Distribution?
Yes there are a few exceptions to taking the Required Minimum Distribution.
1. If you are still working and do not own more than 5% of the business for which you are employed, you can delay taking your RMD from your current employer 401k plan. You are still subject to taking your Required Minimum Distribution from any other IRA or retirement account separate from your current employer. If you own more than 5% of the business you will be subject to taking your RMD from your company retirement plan. Even if you are still contributing to the plan, you are still subject to taking your RMD.
2. If you have a Roth IRA, you are not required to take Required Minimum Distributions during your lifetime because contributions to a Roth IRA are made with after-tax dollars. However, if you have a Roth 401k, RMDs will be required.
3. If you are the beneficiary of a retirement account and you did not inherit the account from your spouse, you will be required to take a required minimum distribution.
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