June 20, 2017
What are Required Minimum Distributions (RMDs)?
Required Minimum distributions, often referred to as RMDs, are amounts the IRS requires you to withdraw annually from your Traditional IRA or employer sponsored retirement plan (401(k), 403(b), 457, TSP, etc.) after you reach age 70 ½. You can always withdraw more than the minimum amount from your account in any year but if you withdraw less than the required minimum, you will be subject to a Federal tax penalty of 50%.
The RMD rules are calculated to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The purpose of the RMD rules is to ensure that people don’t just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. In that case, the IRS is delayed in getting the tax income from them. Instead, required minimum distributions generally have the effect of producing taxable income during your lifetime. Taxable income to you means tax income for the IRS.
When Must RMDs be taken?
Your first required distribution from an IRA or retirement plan is for the year you reach age 70½. However, you have some flexibility as to when you actually have to take this first-year distribution. You can take it during the year you reach age 70½, or you can delay it until April 1 of the following year. However, after the first year, RMDs must be taken no later than December 31 of each calendar year until you die. That means that if you opt to delay your first distribution until April 1 of the following year, you will be required to take two distributions during that year–your first year’s required distribution and your second year’s distribution as well.
There is one situation in which your required beginning date can be later than described above. If you continue working past age 70½ and are still participating in your employer’s retirement plan, your required beginning date under the plan of your current employer can be as late as April 1 following the calendar year in which you retire. Again, subsequent distributions must be taken no later than December 31st.
How much do I need to take?
RMDs are calculated based on your age and the value as of December 31st of the prior year. See the IRS website for the Uniform Lifetime Table which provides the life expectancy factor used to make the calculation. If your spouse is more than ten years younger than you, there is an alternate table that can be used.
What if I don’t need the money?
Whether you need the income or not, you must take the distribution. Some financial institutions will allow you to reinvest the funds automatically into a non-retirement account which would allow the funds to remain invested. However, it would not avoid the tax liability on the distribution
At Kramer Wealth Managers, we can help you navigate your retirement income strategy around RMDs and help you make a decision on how to utilize them once you turn 70 ½. Contact us today to discuss your WealthPath.