Thanksgiving is over and the Christmas season is upon us. Which means that we here at Petra Financial are engaged in an annual ritual of putting a wrap on RMDs. We frequently get questions about this provision of the tax code, especially as people approach retirement. So, I thought it would be helpful to spend a few minutes on this somewhat complicated topic.
To begin with, the basic premise is that you cannot keep funds in your retirement accounts indefinitely - your friends in D.C. want the taxes! You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.
Your required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year.
- You can withdraw more than the minimum required amount.
- Your withdrawals will be included in your taxable income except for any part that was taxed previously (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
Calculating the required minimum distribution
The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. There is also a table for non-spouse inherited IRAs. The definitive source for information on IRAs is IRS Publication 590B which contains these tables. Also, there is an RMD calculator on our Petra Financial website.
Beginning date for your first required minimum distribution
- IRAs (including SEP and SIMPLE IRAs)
- April 1 of the year following the calendar year in which you reach age 70½.
- 401(k), profit-sharing, 403(b), or other defined contribution plan
Generally, April 1 following the later of the calendar year in which you:
- reach age 70½, or
The date you reach age 70½ is obviously the date that is 6 calendar months after your 70th birthday. This is known as your required beginning date and that year is your required beginning year.
Example: You are retired and your 70th birthday was June 30, 2017. You reached age 70½ on December 30, 2017. You must take your first RMD (for 2017) by April 1, 2018.
Example: You are retired and your 70th birthday was July 1, 2017. You reached age 70½ on January 1, 2018. You do not have an RMD for 2017. You must take your first RMD (for 2018) by April 1, 2019.
If you are still employed after your required beginning date and are covered by a corporate- sponsored retirement plan (ex. 401(k)), the plan’s terms may allow you to wait until the year you actually retire to take your first RMD (unless you are a 5% owner). Alternatively, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70½, even if you have not retired. If you own 5% or more of the business sponsoring the plan, then you must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70½.
Date for receiving subsequent required minimum distributions
For each subsequent year after your required beginning date, you must withdraw your RMD by December 31.
The first year following the year you reach age 70½ you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.
Example: John reached age 70½ on August 20, 2017. He must receive his 2017required minimum distribution by April 1, 2018, based on his 2016 year-end balance. John must receive his 2018 required minimum distribution by December 31, 2018, based on his 2017 year-end balance.
If John receives his initial required minimum distribution for 2017on April 1, 2018, then both his 2017and 2018 distributions will be included in income on his 2018 income tax return.
Consequence for failing to take required minimum distributions
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. This is one of the worst penalties in the tax code and therefore one to be studiously avoided.
I hope you will find this information to be beneficial. As always, if you have any questions, please do not hesitate to call me. Also, if you have suggestions for future topics, please email us, or send a message to us at our website.
Until next time, Cheers!