Are you ready for your raise at 70½?
At the beginning of each year, we spend a lot of time talking with clients about their Required Minimum Distributions, or RMDs. So, what is a RMD and who does it impact?
The RMD requirement impacts anyone who will become 70½ or older in the current calendar year with retirement savings in an IRA, SIMPLE IRA, SEP IRA or retirement plan account.
When does the RMD have to be satisfied?
Although technically the RMD requirement in the first year has a deadline of April 1st of the year following turning 70½, most take their first distribution in the year they turn 70½. Each year after the initial requirement, the distribution must be made by December 31st of that year. There is complete flexibility on how you take the distribution – monthly, quarterly, annual, etc.
What happens if the distribution isn’t made by the deadline?
If the RMD is not satisfied, the IRS imposes a penalty equal to 50% of the amount that failed to be withdrawn. For example, if the RMD amount was $2,000, the penalty for failing to withdraw would be $1,000. This is a very large penalty that can be avoided with good planning.
How much is required to be withdrawn from the account(s)?
Well, that depends. The distribution amount is based on the account balance as of 12/31 of the immediately preceding calendar year divided by an age factor found on the IRS’s Uniform Life Table.
James turns 73 in 2018 and his 12/31/17 account value was $300,000. What will his RMD for 2018 be?
|12/31/17 Account Value:||$300,000|
|Uniform Life Table Factor:||24.7|
A RMD is required to be taken from all the retirement accounts an individual holds, with few exceptions. However, if an individual has more than one account with like registration, the total RMD amount can be withdrawn from one account to satisfy the RMD for both.
A few other common questions about RMDs:
Do I have to take a RMD from my Roth IRA? No, Roth IRAs only require distribution after the death of the owner. While the owner remains living no distributions are required regardless of age.
Can I complete my RMD but not have it impact my taxable income?
Yes, there is an IRS rule allowing individuals to make Qualified Charitable Distributions or QCDs. Under this provision, individuals with an RMD may elect to give directly from their IRA to a 501(c)(3) organization. If you are charitably inclined and interested in this option, speak with your Planner to see if it makes sense for your situation.
Do I now know everything about RMDs?
No! While the formula is simple, the rules and how they apply to each individual should be discussed with your planner. We like to start talking about them a few years in advance to get ready for the tax implications and strategies available for you.
Written By Patricia Spies, CFP®