What is a Required Minimum Distribution (RMD)?
After you turn 70½, the IRS requires you withdraw a portion of the money in your retirement savings accounts each year (except for Roth accounts1). This is called a Required Minimum Distribution (RMD). Many of you who are enjoying your 2nd Half are approaching or have reached 70 years.
Congratulations!
What are the rules concerning a traditional IRA?
The rules for traditional IRAs2 are straight forward. You must take an RMD from a traditional IRA after you turn 70½, even if you are still working.
What if I have a different type of retirement plan?
Other types of retirement plans are less stringent if you are still working past 70½. For SEP and SIMPLE IRAs, pension and profit-sharing plans and 401(k), 403(b) and 457 retirement plans, you must begin taking RMDs past age 70½. However, if you are still employed, you may be able to delay taking RMDs from a profit-sharing plan, a pension plan, or a 401(k), 403(b) or 457 plan until you retire.
The exception: if you own 5% or more of a business sponsoring such a retirement plan, you must take RMDs from these types of accounts after you turn 70½.
When do I have to take the money during the calendar year?
The RMD deadline is December 31 of each year. There is one notable exception. The IRS gives you 15 months instead of 12 to take your first RMD (the one after you reach 70½). Your first RMD must be taken in the calendar year following the year you turn 70½. For example, in the year you turn 70½, you can delay your initial RMD until April 1 of the following year. However, if you put off your first RMD until the next year, you will still need to take your second RMD in that same year (two in one year). This will affect your taxes too!
What if I have more than one IRA or retirement account?
Calculating an RMD is complicated. You may have more than one tax-deferred retirement savings account that should be considered.
If you own more than one traditional, SEP or SIMPLE IRA, annual RMDs for these accounts must be calculated separately. However, you have some leeway about how to withdraw the money. You can withdraw 100% of your total yearly RMD from just one IRA, or you can withdraw equal or unequal portions from each of the accounts.
For 401(k)s and other qualified retirement plans, a separate RMD must be calculated for each plan. If you have multiple 403(b) TSAs, you can optionally withdraw the sum of all of the RMDs for them from one 403(b) TSA. RMDs for qualified retirement plans must be paid out separately from the RMDs for your IRAs.
Are RMDs taxable?
You bet! Withdrawn amounts are characterized as taxable income under the Internal Revenue Code. Excess amounts withdrawn can’t be forwarded to apply toward next year’s RMDs.
What if you don’t need the money?
The withdrawal amounts may be redirected toward other opportunities. While putting the money into a savings account or a CD is the usual route, there are other options.
- Charitable giving. (With enough lead time, a QCD (Qualified Charitable Distribution) may be arranged; this IRA distribution meets the RMD requirement and isn’t counted as taxable income).
- Start a grandchild’s education fund.
- Fund a Long Term Care insurance policy.
- Leverage your estate using life insurance.
- Diversify your portfolio through various investments.
- Fund a Roth IRA, if you are still working.
RMDs are complicated. You should talk to your financial advisor or tax advisor about how and when to take your RMD. Review all of your retirement accounts with your advisor to make sure you fulfill your RMD obligation. There is a hefty penalty if you miss an RMD or withdraw less than what you should – 50% of the amount not withdrawn on top of the ordinary income tax.
To recap, be vigilant and timely when it comes to calculating and taking your RMD. Have a tax professional or financial advisor help you, and have a conversation about the destiny of that money.
As always we are here to help create your best 2nd Half. Contact us by email or call the office at (719) 630-0600 to set up an appointment.
