What You Need to Know About Required Minimum Distributions

By the time you retire, IRAs and other retirement accounts may represent some of your largest assets. If this is the case, you’ve likely enjoyed the benefit of tax-deferred growth of earnings on those accounts for many years. But at some point, Uncle Sam will want you to start taking distributions from those assets (and pay the appropriate tax due on them). This explains the existence of Required Minimum Distribution (RMD) rules.

At a certain stage in life, the tax code requires that you begin withdrawing at least a minimum amount from your IRA on an annual basis. This is true regardless of whether you need to take money out of these accounts to meet your cash flow needs in retirement.

Here are answers to some of the most important questions you may have about RMDs and how they apply to your circumstances.

Q: At what age do RMDs first apply?

A: The year you turn 72 is considered your beginning date. You have until April 1 of the year after you reach age 72 to take your first required distribution. 

Q: After that first year, what is my deadline to take an RMD?

A: In every subsequent year, RMDs must be received by December 31. Note that if you wait to take the initial RMD until the year after the year in which you turn 72, you will have to take two distributions in the same year, exposing you to potentially greater tax liability. 

Q: What accounts are subject to RMDs?

A: Traditional IRAs, SEP IRAs and SIMPLE IRAs. Also, RMDs apply to workplace plans such as 401(k)s, 403(b)s, 457(b)s, profit sharing plans and other defined contribution plans. RMDs can be delayed from workplace retirement plans until April 1 of the calendar year in which you retire if you remain employed with the plan sponsor past age 72. 

Q: Are Roth accounts subject to RMDs?

A: One of the great advantages of Roth IRAs is that RMDs do not apply, so your money can continue to grow on a potentially tax-free basis indefinitely. However, RMDs do apply to Roth 401(k)s.

Q: How are RMDs calculated?

A: To make the calculation, you first must know the value of the account at the end of the previous calendar year. Then, using tables provided by the IRS, the minimum distribution is calculated. For most 72-year-olds with a $200,000 balance on Dec. 31 of the previous year, that amount would be divided by 27.4 years, resulting in a required distribution of $7,299 for the first year. The distribution period declines throughout your life. In certain situations, a different IRS table is used to make the calculation.

Q: Do distributions have to come out of all affected retirement accounts?

A: Yes. Once you reach age 72, RMDs must be withdrawn from each account subject to the rule. Therefore, it may simplify the process to consolidate your retirement accounts. This includes rolling workplace retirement plans into IRAs. Talk to your financial and tax professional to discuss the pros and cons of consolidation.

Q: What is the penalty if I fail to take RMDs on a timely basis?

A: If you fail to take an RMD in a given year or withdraw an insufficient amount, a penalty equal 50% of the value of the amount you failed to withdraw as required will be applied.

Q: What if I don’t have a need for the money I’m required to withdraw?

A: One option is to utilize a Qualified Charitable Distribution (QCD). This allows money to be distributed directly to a charity. Such a distribution can be applied toward your RMD in a given year. There is a $100,000.000 annual cap on the QCD.

This information is designed to help you understand some of the basic rules about RMDs. However, it’s important that you meet with your financial advisor to talk about RMDs in the context of your overall retirement income strategy, and your tax advisor to make sure you are complying with tax rules.

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Michael D. Lanuto, CRPC®, AWMA® is a Financial Advisor with S.M. Miller & Associates, a private wealth advisory practice of Ameriprise Financial Services, LLC. in Albany, NY.  He specializes in fee-based financial planning and asset management strategies and has been in practice for 7 years. To contact him: 518-949-2039; 4 Atrium Drive, Ste 200, Albany, NY, 12205; Michael.Lanuto@ampf.com; https://www.ameripriseadvisors.com/michael.lanuto/lp/request-contact/3/. 

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