Article by Rob Russell     December 7, 2016 FORBES (Modified by B&H Wealth Strategies)

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RMDs (Required Minimum Distributions) are mandatory upon reaching age 70 1/2. At this age, and for the rest of your life, you have to start withdrawing money from your IRAs each year and pay income tax on it. Here are 3 common mistakes as it pertains to these required distributions.

Mistake #1 – Miscalculating or forgetting to take your RMD

The most expensive and easiest mistake for you to make at RMD time is miscalculating or neglecting your RMD. For any amount that you do not take out and pay tax on the IRS levies one of the stiffest penalties in the internal revenue code – a 50% penalty.  Yes that’s right – a 50% penalty.

To calculate your RMD, you add all of your qualified retirement accounts ending balances as of 12/31 of the previous year.  You then find your age in the IRS Uniform life table, locate the corresponding life expectancy factor, and then divide the total by the life expectancy factor.

The required minimum percent increases each year requiring you to take larger and larger amounts out of your IRA and possibly leave less and less for your heirs. At age 85, for example, the required distribution amount is close to 7% of your total IRAs.

RMD Mistake #2 – Taking It From The Wrong Place

Most IRA owners mistakenly believe that you have to take an RMD from each IRA account. The IRS allows for an “aggregation” of IRAs – they could care less which IRAs you take the distribution from – they just want you to withdraw at least the minimum amount. So, one rule of thumb would be to take your RMD from your best performing account or any IRAs that have excess cash because of accumulated dividends. It is important to note that you are not required to take an RMD from your Roth IRAs as they have already been taxed.

RMD Mistake #3 – Not Investing More Prudently

One of the most overlooked aspects of RMDs is how we should actually invest our portfolio since we are now forced to withdraw our money at a pretty good clip. Most retirees would be happy to live off of their interest/dividends and leave their principal to their heirs or even grow it a bit, but most investors or their advisors do not have a plan to accomplish this.

Because the RMD withdrawal rates begin at 3.65% at age 70 ½ and steadily climb to 4%, 5%, and beyond, if not invested properly, it can become easy to simply run out of money because you are forced to take out such high amounts from your IRA each year. You must invest prudently in order to meet your RMD and preserve or grow your principal.

A smart, prudent investment strategy when you’re in your RMD years is to use a combination of steady dividend-paying stocks, a diversified selection of preferred stocks, real estate investments, income producing private equity, and fixed annuities to generate a broadly diversified income plan designed to exceed your RMD each year and provide some growth.

Looking for someone to help you with your RMD or a prudent investments strategy? Contact us today and put our knowledge and experience to work for you. There is no cost for an initial meeting where we can get to know more about you and discuss ways we can help you. Click here to schedule or meeting or call (423) 247-1152 to request more information.