Understanding Your Required Minimum Distributions
The phrase RMD, or Required Minimum Distributions, refers to the amount that you are required to withdraw from any traditional IRAs or employer-sponsored retirement plans each year after you reach age 70 ½. You can take more than the required minimum, but you are not allowed to take less. If you do not take the entire amount that you are required to you will have to pay a penalty. These rules were set up to prevent people from accumulating tax-free money, dying, and passing the money on to their heirs. The government wants to collect the tax money from you during your lifetime.
Which Accounts Are Subject?
There are several different accounts that are subject to RMD rules. These include:
- Traditional IRAs
- Simplified Employee Pension IRAs (SEPs)
- SIMPLE IRAs
- Qualified Pension Plans
- Qualified Stock Bonus Plans
- Qualified Profit Sharing Plans (including 401(k)s)
- Section 457(b) Plans
- Section 403(b) Plans
Roth IRAs do not follow the RMD rules since you fund them with after tax money. If you are not sure if any of your accounts fall under these rules consult the administrator of your plan or a qualified tax professional.
When Are You Required to Take RMDs?
You are not required to take any distributions until you reach the age 70 ½. For you first distribution you have the flexibility of taking it the year you turn 70 ½ or delaying it until April 1st of the next year. Your distributions for the following years must be taken by December 31st of each year. You will have to continue taking distributions until you exhaust your account or you die.
If you chose to delay your first distribution until April 1st of the following year, you will be required to take two distributions that year. Your first-year distribution on April 1st and your second-year distribution on December 31st. All subsequent years you would only be taking one distribution per year.
How Much Are You Required to Withdraw?
The amount you are required to withdraw each year is based upon the balance of your account and your distribution period (this is based on your life expectancy as set out by the Uniform Lifetime Table). To calculate your distribution, you divide your account balance (as of December 31st of the previous year) by your distribution period.
If you have multiple IRAs, there is a separate RMD calculated for each account, but you can withdraw the total amount from any one of your IRAs. Distributions from Inherited IRAs and Inherited Roth IRAs would count towards this amount. Your RMDs on employer plans are calculated separately and must be paid separately from each corresponding plan.
What Happens If You Don’t Take Your RMDs Properly?
If you do not take sufficient distributions you will be subject to a 50% excise tax penalty on the amount that you did not withdraw. For example: If your RMD is $5,000 and you only take a distribution of $3,000, you will be required to pay the 50% penalty on the remaining $2,000. This penalty is in addition to the tax that will be paid on the distribution.
How Are RMDs Taxed?
Required minimum distributions are taxed like any other distribution that you would take from your qualified investment accounts. You will have to pay federal and state income tax on it for the year that you took the distribution.
Required minimum distributions are important. Not taking them, or taking them incorrectly could end up costing you a lot of money. If you are unsure about your distributions meet with a qualified tax professional who can properly calculate your distributions and help reduce your tax liability.
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