A year-end review of your retirement accounts

December 03, 2021

If you want to successfully save for retirement, you need to learn how to properly manage your retirement accounts. An annual review of your IRAs, 401(k)s and other retirements accounts will help you stay on track. Here are three questions to help with your review. Next week we will consider three more.

Q: Am I maximizing my contributions to my retirement accounts?

A: Saving for retirement is an exercise in financial self-control. The key to long-term success is to maximize your annual contributions to your retirement accounts and then keep that money invested in a well-diversified portfolio of high-quality stocks and bonds. It may not be easy to spend less today so you can prepare for tomorrow, but people do it all the time and so can you.

If your company sponsors a 401(k) plan, you can contribute up to $19,500 this year. If you are age 50 or older, you can make a “catch up” contribution of another $6,500. Check your latest paycheck stub to see how much you have contributed so far this year. If it is less than the maximum, give yourself a nice Christmas present by asking your employer to withhold enough in December to take you to your annual maximum. If that isn’t possible, do as much as you can now and get set up to maximize your contributions in 2022. Remember, every dollar saved today will grow and bring you added security and financial freedom in the years to come.

Q: Do I need to take a required minimum distribution this year?

A: Some people are confused about required minimum distributions (RMDs) in 2021 because RMDs were suspended in 2020 as part of the COVID relief effort. Rest assured that RMDs are definitely back in 2021.

If you were born before July 1, 1949, you needed to start taking RMDs during the year you turned 70 ½. If you were born after June 30, 1949, your RMDs start the year you turn 72. For many people, that will be 2021. Your first RMD is due by April 1 of the year following your first RMD year. Every other RMD is due by December 31 of the year for which it is calculated.

RMD rules apply to a wide range of retirement plans, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b), 457(b), profit sharing, and other defined contribution plans. Some of these plans allow for exceptions. For example, if you are still working, you can defer taking RMDs from a 401(k), 403(b) or other defined contribution plan until you retire. However there is an exception to this exception if you own more than 5 percent of the sponsoring company. In that case, you must begin taking your RMDs at your normal RMD age.

Q: How much do I need to take for my RMD this year?

A: Be careful when you calculate your RMD amount. When an RMD is missed or miscalculated, the IRS can levy a penalty equal to 50 percent of any shortfall. Faced with such steep penalties, it pays to take time to make sure your RMD is correct.

Your RMD is equal to the value of your retirement account at the beginning of the year divided by the appropriate distribution period given your age at the end of the year. If your spouse is the sole beneficiary on your IRA and is more than 10 years younger than you, you will find the appropriate distribution period on the IRS’s “Joint Life and Last Survivor Expectancy” table. Everyone else will use the “Uniform Lifetime” table. These tables are available from a number of sources and are easily found with a simple Google search. Here’s a sample calculation:

Suppose your IRA was worth $100,000 at the beginning of 2021 and you turned 75 years old on July 4, 2021. Looking at the Uniform Lifetime Table, we see that the distribution period associated with age 75 is 22.9 years. Therefore, your RMD for 2021 is $100,000 divided by 22.9, or $4,366.81.

Note that if you have several IRAs, you can calculate your RMD based on the aggregated value of all the IRAs and then take the RMD from any or all of the IRAs. However, if you have multiple defined contribution plans, you must take the RMD from each defined contribution plan separately.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to steve@montereypw.com.