Required Minimum Distribution: IRS’s Reminder That You’re 70½

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As the saying goes, all good things must come to an end at some point.

Unfortunately that includes the tax deferral you have received after years of delaying income tax on contributions to your 401(k) and IRA qualified retirement accounts.

Distributions from these qualified accounts are required after age 70½ and are taxable. These payouts are called required minimum distributions (RMD), and are the smallest amount of money Uncle Sam will require you to withdraw from your retirement accounts each year, beginning April 1 of the year after you turn 70½. You will then have to take withdrawals by Dec. 31 for each ensuing year.

What retirement accounts do Required Minimum Distributions apply to?

• 401(k), 403(b), 408, 415 and 457 retirement plans
• SEP IRAs
• SIMPLE IRAs
• Traditional IRAs
• Pension and profit sharing plans
• Inherited beneficiary qualified accounts

Although Roth IRAs are an exception, as you will not be required to take RMDs from a Roth IRA during your lifetime, your beneficiaries will be required to meet RMD rules. This is because IRAs are intended to be retirement plans, not wealth or estate transfer vehicles, so the IRS wants their share of the taxes once you are gone.

How are RMDs calculated?

RMDs are calculated annually, by dividing your traditional IRA or retirement account balance by your life expectancy. The December 31 balance of your accounts is used to determine the distribution to be taken the following calendar year. This is in part why you receive a Form 5498 midway through the year showing December 31 balances from all your retirement accounts.

Your distribution must be taken by December 31 except for the first year when it may be as late as April 1 of the year after you turn 70 ½. You can always withdraw more than required, however, if you fail to take at least the RMD for any year (or if you take it too late), you will be subject to a federal penalty, which is up to 50 percent of the amount that you were supposed to withdraw.

How do I calculate my RMD?

The Required Minimum Distributions rules can be extremely complex, especially in regards to inherited IRAs, as they affect you, your spouse and your beneficiaries, so give us a call at 440-779-1430 so we can assist you in determining your RMD.

You will want to make sure to consult with your advisor, tax professional or estate planning attorney. They will be sure to comply with the IRS rules, so that you do not incur a penalty, or worse yet, outlive your income.

 

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