Get to Know Required Minimum Distributions

Turning age 70½ is a major milestone if you own an IRA. You must consider how required minimum distributions (“RMDs”) fit into your retirement withdrawal strategy. That’s because, upon reaching this age, the IRS requires you to withdraw at least a minimum amount each year from all your IRAs and retirement plans — except Roth IRAs — and pay ordinary income taxes on the taxable portion of your withdrawal.

Generally, your RMD for a given year must be withdrawn by December 31 of that year, either in a lump sum or in installments. The government requires you to take RMDs by April 1 of the year after you turn 70½. This means, if you defer the RMD to the year after turning 70½, you will have two required distributions that year — one by April 1, and one by December 31. This can put you in a higher tax bracket for that year, significantly increasing the tax you owe.

You generally should take RMDs from any retirement account in which you contributed tax-deferred assets or had tax-deferred earnings. These accounts include:

  • Traditional IRAs
  • Rollover IRAs
  • SIMPLE IRAs
  • SEP IRAs
  • Most Keogh accounts
  • Most 401(k) and 403(b) plans

The use of RMDs limits the chance that money will sit in these accounts — untaxed — indefinitely.

The RMD calculation typically starts with the adjusted market value of the retirement account as of the end of the preceding year. The account owner divides this by a life expectancy factor set by the IRS and published in one of the following tables:

  1. The Uniform Lifetime Table. This is used unless the spouse is the sole beneficiary, and he or she is more than 10 years younger than the account owner.
  2. The Joint Life and Last Survivor Expectancy Table. This is used when the sole beneficiary is a spouse who’s more than 10 years younger than the account owner.
  3. The Single Life Expectancy Table. This is used with inherited IRAs.

RMDs are taxed as ordinary income for the tax year in which they are taken and will be taxed at your applicable individual federal income tax rate. RMDs may also be subject to state and local taxes. If you made nondeductible contributions to your IRA, you must calculate your RMD based on the total balance, but your taxable income may be reduced proportionately for the after-tax contributions.

Inherited IRAs have special rules for RMDs and the required distributions are time-sensitive, usually beginning in the year following the year of decease of the original owner.

If you have multiple accounts that require distributions, you have to calculate distributions for each, but you can take the total required distribution from just one account if you’d like. Employer-sponsored defined contribution plans — such as a 401(k) — work differently than IRAs. In this case, you must calculate your RMD from each plan and take it from that plan. (The rules differ for 403(b) accounts.)

For Roth IRAs, there are no RMDs for the original owner. If you have both types of IRAs, traditional and Roth, withdrawals from a Roth IRA will not help satisfy your annual RMD requirement for your traditional IRA.

Owners of many defined contribution plans, such as 401(k) plans, who work past age 70½ can delay their RMDs until they’re retired, if the plan allows, and they don’t own 5% or more of the business that sponsors the plan.

If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

One exception to RMDs being taxed as ordinary income occurs when RMDs are taken as Qualified Charitable Distributions (“QCDs”). A QCD is a direct transfer of funds from an IRA custodian, payable to certain qualified charities, allowing a taxpayer age 70½ or older, to exclude the amount donated from taxable income.

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