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Custodians, Depositories & RMDs

Senior couple

Many critical components shape the management and compliance of IRAs. Whether you're new to IRAs or seeking to deepen your knowledge, this overview will equip you with essential insights to navigate these crucial aspects effectively. 

Required Minimum Distributions (RMDs) 

Required Minimum Distributions (RMDs) are mandatory withdrawals that traditional IRA owners must begin taking annually once they reach a certain age, typically 73 years old (or 70½ if born before July 1, 1949).

These withdrawals are calculated based on life expectancy factors provided by the IRS and aim to ensure that tax-deferred retirement savings are eventually subject to taxation. Failure to withdraw the required amount can lead to significant IRS penalties. Roth IRAs, however, do not require RMDs during the account owner's lifetime.  

To calculate RMDs, one must determine the IRA account balance as of December 31 of the previous year and divide it by the appropriate life expectancy factor based on the IRA owner's age.

- This calculation is crucial for maintaining compliance with IRS regulations and avoiding penalties. 

RMD calculation
Account Balance

as of December 31 last year

÷

Life Expectancy Factor

see the Uniform Life Table to find the factor using the age you turn this year

= Your RMD
EXAMPLE
$100,000

Account Balance

÷

27.4

Divisor IRA owner turned 72 this year

= $3,649.64

IRS Uniform Life Expectancy Table can be found here.

Custodians

Custodians play a pivotal role in the administration and management of IRAs. These financial institutions, such as banks, credit unions, brokerage firms, and specialized IRA custodians, are authorized by the IRS to hold and safeguard IRA assets on behalf of account owners. Custodians ensure compliance with IRS rules, facilitate IRA transactions (including contributions and distributions), maintain accurate records, and provide regular account statements to IRA holders. 

A custodian’s responsibilities extend beyond mere asset custody. They are also tasked with educating IRA owners on IRS regulations governing contributions, withdrawals, and allowable investments within the IRA framework. Whether managing traditional, Roth, SEP, or SIMPLE IRAs, choosing a reputable custodian is crucial for ensuring the security and legality of IRA transactions. 

Depositories

Depositories are specialized facilities responsible for the physical storage of certain IRA assets, particularly those held within self-directed IRAs. Assets such as precious metals (gold, silver), real estate deeds, and certain alternative investments require secure storage in IRS-approved depositories to maintain compliance with IRS regulations. 

Depositories ensure the safekeeping of IRA assets through stringent security measures, including physical security, insurance coverage, and regular audits. Account owners typically have limited direct access to their assets stored in depositories but can monitor holdings through custodian-provided statements and periodic account reviews. 

Understanding the Differences

couple finances

Understanding RMDs, Custodians, and Depositories is fundamental to effectively managing an IRA and optimizing retirement savings strategies.

Whether you're planning for retirement, diversifying your investment portfolio, or ensuring IRS compliance, knowledge of these components empowers informed decision-making and enhances financial security. 

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