Even if you don’t need the money to pay your bills, you have to take the distributions and pay the associated taxes. The way the IRS sees it, you’ve been deferring your taxes in those accounts for long enough — it’s time to start paying the bill. And Uncle Sam means business on this point: Normally, if you take less than your required distribution, you pay a 50% penalty on the shortfall.
Taking RMDs in 2020 may deplete your savings too quickly
RMDs aren’t designed to drain your retirement stores, but they have the potential to in 2020. This has to do with how they’re calculated, along with the timing of the recent market volatility. In any given year, your RMD is based on your account balance at the end of the prior year and your age. The goal is to mandate a fair distribution amount based on how long your money needs to last.
The thing is, the stock market has flailed this year. Your account balance today is probably much lower than it was at the end of 2019. So, the usual RMD formula would lead to fairly high distributions given what your retirement portfolio is worth right now.
For example, say your 401(k) was worth $750,000 at year end, and you are 74 years old. Since year end, your account value has dropped 18% to $615,000. According to the SEC’s RMD calculator, you’d normally have to take $31,512.61 in distributions from that account in 2020. If we recalculate the RMD based on the current account value of $615,000, that equates to lower RMDs of $25,840.34.