You spent decades saving for retirement. A long time ago, you understood and took to heart the advice about the importance of retirement savings. You’ve just turned 70, and you’re proud of your financial achievements.
You worked hard. You sacrificed. Now you’re retired and doing well enough so that you don’t have to take money from your retirement savings. After all, you’re still healthy and strong, and you’d prefer to let your retirement investments grow even more.
Besides, you don’t really need it right now.
The truth is, federal rules require you to begin making regular withdrawals from certain retirement savings accounts once you reach 70½. It’s called the Required Minimum Distribution, and it’s the minimum you have to withdraw per year. You don’t have a choice.
The RMD rule applies to certain plans.
Once you reach 70½, you have to start making withdrawals from IRAs, Simple IRAs, SEP IRAs and other retirement accounts. Roth IRAs are exempt from the requirement until the account owner dies.
Here are two important provisions:
• You may withdraw more than the minimum required amount.
• Withdrawals are considered taxable income; exceptions include money that was previously taxed or is considered tax free, such as distributions from certain Roth accounts.
You calculate the RMD for a year by dividing the account balance at the end of the preceding calendar year by the number from an IRS distribution table (“Uniform Lifetime Table”). For more information, go to https://www.irs.gov/retirement-plans/plan-partici pant-employee/required-min imum-distribution-worksheets.
The link directs you to select between two options:
• A worksheet to calculate your withdrawal if your spouse is more than 10 years younger than you.
• A worksheet for everyone else.
The date to receive your first distribution varies depending on the type of retirement account.
For IRAs (including SEP and Simple IRAs), it’s April 1 of the year following the year when you reached 70½. So, if you reach 70½ in 2019, you have until April 1, 2020.
For 401(k), profit-sharing, 403(b) and other defined contribution plans, it’s the same as mentioned above or when you retire, whichever is later.
You must make account withdrawals every year by Dec. 31. The calendar year after you reach 70½ you’ll have to make two withdrawals, April 1 and another by Dec. 31. To avoid having to pay taxes on both those payments, you may take the first withdrawal in the year you reach 70½ before Dec. 31. That way the income falls into two separate tax years.
If you have more than one IRA, each custodian will provide the RMD amount that needs to be withdrawn from their account. The total of all account RMDs can be withdrawn proportionately or from any single account.
If you don’t take withdrawals or don’t take adequate amounts, you may face 50 percent excise taxes on the amounts that are not distributed.
This is why consolidation of IRA accounts makes sense as you near 70½. Nobody wants to inadvertently pay a $500 excise tax, plus ordinary income tax, for forgetting to take a $1,000 RMD from a forgotten IRA account.
What does the Required Minimum Distribution mean? Time to pay taxes on certain retirement savings accounts, whether you need the funds or not, and you better not miscalculate. If in doubt, seek qualified professional help.
