Time to Take Those RMDs
The Deadline for Required Minimum Distributions
Heads up, recent septuagenarians. If you turned 70 1/2 last year, the Internal Revenue Service wants to remind you that it's time to crack your nest egg. That's the age at which individuals must begin taking required minimum distributions (RMDs)from workplace retirement plans.
What Are Required Minimum Distributions?
A required minimum distribution is the minimum amount that must be withdrawn from your retirement account each year, whether or not you've actually retired.
If you haven't taken distributions prior to age 70, it should be done during the year you turn 70 1/2 or no later than April 1 of the year after you reach age 70 1/2. After the first year, RMDs must be made each year by December 31.
All employer sponsored retirement accounts require minimum distributions. These include profit-sharing plans, 401(k)s, 403(b) and 457 plans, Individual Retirement Accounts (IRAs) and SEP, SARSEP and SIMPLE IRAs. Roth IRAs do not require minimum distributions while the account holder is alive, but if you have a Roth 401(k), which is similar to a Roth IRA but offered through work, RMDs are required.
If you have more than one account requiring an RMD, you must take distributions from each account. For owners of 401(k) or 457b plans, that means each plan requires a full minimum distribution. However, if you have an IRA or 403(b), your total distribution amount may come from a combination of accounts.
(There are also special rules for 403(b) plans with pre-1987 contributions. Visit the IRS.gov site for more information if this sounds like your account.)
What Happens If I Miss an RMD?
As the plan holder, it's your responsibility to determine the minimum that should be taken from your plan and to take the distribution before the deadline.
Those who don't face a penalty. Whatever amount you were supposed to withdraw will be taxed at 50 percent. If you miss it because of error or oversight, you may be able to avoid the penalty if you can explain the mistake to the IRS and offer steps fix the problem.
To figure out your RMD for the first year, you generally divide your savings balance by your life expectancy. The IRS helps to explain and make this easier in Publication 590-B. Other circumstances may apply. For example, if you are married to a spouse who is more than 10 years younger than you are, your RMD calculation might be different.
The plan administrators running your 401(k) or other qualified plan will likely provide education and information on how to take distributions from a retirement plan.
If the IRA is held by a trustee, the trustee must either calculate and make the distribution on behalf of the account holder, or report the RMD amount to the holder of the account.
RMDs Are Different for Inherited Accounts
If you inherit an IRA from someone else, age doesn't factor into RMDs. In general, beneficiaries must take distributions five years after inheriting the account. Typically, people who inherit IRAs roll them over into their own account, where the standard rules apply.
Beneficiaries of an IRA or other retirement account should seek the advice of a tax or financial planning professional to determine the best strategy based on individual circumstances.
Plan Ahead for RMDs
The IRS encourages taxpayers to begin planning during the current year any distributions required in the coming year. Retirees should make RMDs part of your year-end tax planning.
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