Whether you’ve spent a few years or a few decades putting money into your retirement account, at a certain point you need to start taking that money out. An RMD – or required minimum distribution – is the minimum amount of money you must withdraw from your retirement account every year once you reach a certain age.
If you’re approaching retirement age, it’s especially important to understand how required minimum distributions work to make sure you’re getting the most out of the money you’ve spent so long putting away, and so you’re aware that failure to take the distribution can result in 50 percent excise tax on the amount that should have been withdrawn.
When Do I Start Taking Required Minimum Distributions?
You can start withdrawing from your retirement fund as soon as you retire, although there are potential penalties if you take distributions before you reach age 59½.
But not everyone wants to pull their money out right away. Some people choose to delay savings withdrawals, hoping to give their retirement account as much time as possible to grow even if they’re no longer making contributions. Some people work into their seventies and continue to actively contribute to their 401(k) or IRA.
If you fall into one of the latter two camps, you should know that there’s a certain date the IRS requires you to start taking your required minimum distributions from qualified retirement accounts. That date varies a little bit depending on what kind of retirement savings account you hold.
For a non-Roth IRA, the date is based on age. You have to take your first required minimum distribution by April 1 of the year following the calendar year in which you turn 70½. This is true regardless of whether you’ve retired or not.
Example: Let’s say you turned 70 on March 20, 2016. That means you’d be 70½ on Sept. 20, 2016. So you’d have to start taking the required minimum distribution (RMD) by April 1, 2017.
What if your birthday is later in the year? If you turn 70 on Oct. 29, 2016, then you’d be 70½ on April 29, 2017. Because you didn’t hit that 70½ mark until 2017, you’d have until April 1 of 2018 to start taking your required minimum distributions from your IRAs.
For a 401(k), profit sharing, or other defined contribution plan, the rules are a little different. You have to start taking RMDs by April 1 of the year after the calendar year in which you: a) reach age 70½; or b) retire (if allowed by your plan), whichever is later. That means that if you work until age 72 or beyond, you’re exempt from the 70½ rule and your first withdrawal date would depend on your retirement date rather than your half-birthday.
Note that if you own 5 percent or more of the business that provides your 401(k) or other defined contribution retirement plan, you have to take RMDs in the same manner as IRAs regardless of when you retire.
Roth IRAs have no minimum distribution requirements as long as the owner is alive. However, some Roth accounts are subject to the RMD rules, so you should check with your tax professional if you have questions regarding your Roth IRA.
When Do I Have to Take Them By?
You can take your RMD at any time during the year after the April 1 requirement is met for your first withdrawal. You have the option to do a single large distribution or to take multiple withdrawals throughout the year – either way is fine, as long as you’ve taken the required annual minimum by the end of the calendar year.
How Do I Know How Much to Take?
If you have an IRA that’s subject to RMD rules, you’ll need to do some figuring.
Start with the fair market value of your IRA as of Dec. 31 of the previous year. Divide that number by the distribution period that corresponds with your age. That number is found on the Uniform Lifetime Table (you may find the IRA Required Minimum Distributions Worksheet helpful), unless your spouse is the sole beneficiary of your IRA and is more than 10 years younger than you. In that case, you’d use the Joint Life and Last Survivor Expectancy Table.
All the IRS’s life expectancy tables can be found in Publication 590-B (2015), Distributions from Individual Retirement Arrangements (IRAs).
If you’re in a 401(k) or other defined contribution plan, you’re in luck – RMD requirements are based on the same rules, but your plan sponsor should calculate the amount for you.
So, using an example from the IRS…
Laura was born on Oct. 1, 1944. She reaches age 70½ in 2015. Her required beginning date is April 1, 2016. As of Dec. 31, 2014, her IRA account balance was $26,500. …. Using the (Uniform Life Table), the applicable distribution period for someone her age (71) is 26.5 years. Her required minimum distribution for 2015 is $1,000 ($26,500 ÷ 26.5). That amount must be distributed to her by April 1, 2016.This amount would satisfy her 2015 RMD requirement.
How about a married retiree? Looking at another example provided by the IRS…
Joe, born Oct. 1, 1944, reached 70½ in 2015. His wife (his beneficiary) turned 56 in September 2015. He must begin receiving distributions by April 1, 2016. Joe's IRA balance as of Dec. 31, 2014, is $30,100. Because Joe's wife is more than 10 years younger than Joe and is the sole beneficiary of his IRA, Joe uses the (Joint Life and Last Survivor Expectancy Table). Based on their ages at year end (Dec. 31, 2015), the joint life expectancy for Joe (age 71) and his wife (age 56) is 30.1 years. The required minimum distribution for 2015, Joe's first distribution year, is $1,000 ($30,100 ÷ 30.1). This amount is distributed to Joe on April 1, 2016.
What If I Have Multiple Retirement Accounts?
Required minimum distributions need to be calculated separately for each account you hold. How they can be withdrawn differs based on what kind of account you’re saving in.
Plan participants in 401(k), 457(b), and other non-403(b) retirement plans have to take their required RMDs separately from each account, according to the IRS.
IRA owners and 403(b) plan participants still need to calculate their RMDs separately, but once they know the full amount required across all accounts, they have options for how to withdraw that money.
That’s because IRAs may be combined with other IRAs for the purpose of withdrawing the required amount. Similarly, 403(b)s may be combined with other 403(b)s. However, IRAs cannot be combined with 403(b)s. And 401(k)s must be treated separately and individually.
Here are some examples, going from simple to more complex.
Example: You own two IRAs. The first IRA requires you to withdraw $100; the second IRA requires a withdrawal of $250.
In total you need to withdraw $350. But IRAs can be treated as “combinable” – which is to say, you could take the full $350 out of just one of them, leaving the other one alone.
Example: Now let’s say you have two IRAs – one from your most recent employer and an older one that you had with a previous employer but never rolled over — plus two 403(b)s.
Same rules apply: you need to calculate the RMD separate for each account. Let’s say each account requires an RMD of $100, to make it easy. That’s $400 total.
403(b)s, like IRAs, are “combinable” – but remember that while 403(b)s and IRAs can mingle amongst their own kind, you can’t “combine” a 403(b) with an IRA.
So, you could take $100 from each, or $200 from one of the IRAs and $200 from one of the 403(b)s – but you couldn’t take $400 from just one of the four accounts.
Example: Let’s mix it up. You’ve got two IRAs, an old 403(b), and a 401(k) at your current employer.
The RMD for each account must be calculated separately. The IRAs can combine. But, you can’t combine the 401(k) with any of those accounts – the 401(k) distribution has to be taken separately.
Example: Finally, let’s say you’ve got two IRAs and two 401(k)s floating around. Once each account’s RMD has been calculated separately, you can “combine” the IRA withdrawal as stated above, but – and this is true of any retirement account outside of IRAs and 403(b)s, not just 401(k)s – you must take each distribution from the retirement accounts separately.
So, if each of your 401(k) (or 457 or other qualifying retirement account) requires an RMD of $100, you have to take a separate hundred dollars from each of those accounts – no combining.
Because this can get complex depending on what your accounts look like, it might be advisable to ask your tax professional for assistance in tailoring your withdrawal strategy.
What Happens If I Don’t Take the Full Amount?
If you don’t take your full RMD each year by the required date, you could face a 50 percent excise tax on the minimum required amount that wasn’t distributed.
Example: Your total RMD for the year is $5,000 but you only take $1,000 out that year. That means that you failed to withdraw $4,000 of your required minimum – and the IRS could hit you with a tax penalty of $2,000. That’s money out of your pocket that you don’t have to lose, as long as you make sure to take the full amount each year.
The IRS website has detailed information as well as the charts, worksheets, and tools you’ll need to figure out what your RMD may look like. In many cases it’s also a good idea to get in touch with a tax professional.
They can help you understand exactly what you need to do when the time comes to make withdrawals and, if you want to reinvest a portion of the money you withdraw, can help you choose your next steps based on your needs and risk tolerance.
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