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Determined by the fair market value of qualified retirement accounts, a Required Minimum Distribution (RMD) is the minimum withdrawal amount account owners must take when they reach age 70½.
Types of accounts affected by the Internal Revenue Service’s RMD rules include inherited IRAs, traditional IRAs, rollovers, SEP IRAs, Keoghs, 401(k), 403(b), and 457(b’s), to name a few. For the average person, RMD rules have little to no impact on using their retirement funds. That’s because most retirees begin taking account distributions several years before turning 70½. They also usually withdraw more than the minimum amount.
However, if you have these accounts and decide to delay taking withdrawals, you should understand RMD basics to avoid inadvertently incurring steep penalties for failing to comply with the rules.
Here are some insights into Required Minimum Distributions that will help you plan and avoid penalties and tax that could eat up 50% or more of your account’s value.
You’ll need to figure it out for yourself.
RMD rules govern all employer-sponsored plans, including Roth 401(k’s) and profit-sharing plans. As long as the account owner is still living, RMD rules do not apply to Roth IRAs. The IRS may send you a reminder letter before your 72 birthday, but they will not calculate the RMD owed. Owners of these accounts are responsible for calculating the correct RMD for all their qualified accounts.
Even though they are not legally required to calculate RMD for clients, most CPAs and financial advisors are happy to assist, and you should ask your planner for help.
If you own multiple IRAs, you will need to determine the correct RMD for each account. If you have a 401(k) or 457(b) plan, the RMD will need to be taken separately from each of those. However, you can withdraw the total amount required from one IRA account rather than having to take a little from each one.
If you’d like to calculate RMD on your own, the IRS has some useful worksheets and explanations of the formulas used on their website. Go here: https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets.
You can withdraw more than the minimum.
While you must always take at least the minimum amount for your RMD, you can take more if you want. Be aware that all your withdrawals are included in your taxable income, minus any part that was taxed before.
What happens if I fail to take my RMD on time?
Starting with April 1st, after a person reaches 70½, they must begin taking annual distributions from all qualified plans owned. For subsequent years, you must take your RMDs by December 31st. If you miss an RMD deadline or withdraw an amount less than the minimum required, the amount that did not get withdrawn incurs a 50% tax rate!
Exceptions to the rules
I don’t think there are many, if any, IRS rules for which there are no exceptions. RMD has its own set of complicated exceptions, including exceptions for still working people after age 70½. If you think you will still be working after that time, you should spend some time on the IRS website and learn if RMD still applies.
For what purposes can I use my RMD?
The only thing you cannot do with an RMD withdrawal is to put that money into another qualified retirement account. Otherwise, you can use RMDs the same way you use your other income streams.
Summing it up
Not everyone will be affected by RMD rules. However, it’s a good idea to go over your accounts with an experienced advisor and make some decisions about when to withdraw money, the amount you should start, and the best way to use your RMD money. To help you with this, I have put together a handy chart that you can download here. http://www.mediafire.com/file/1e150lg4zexn5w3/RMD_Chart_%25281%2529.pdf/file
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