As most of you know, Tax Day, April 15, is quickly approaching, but there’s a key date before then that might be more important for many of you. April 1 is the deadline for those that need to take their first required minimum distribution (RMD) from your IRA. Here we will give you the basics of the RMD and what you need to do.
You can tell from the name, that an RMD is a distribution (or withdrawal) that you must take from your retirement account. Traditional plans are tax-deferred meaning you funded the account with pre-tax money and taxes are deferred until you start taking distributions. As usual, the government wants its cut so you are forced to withdraw funds (which are taxed) whether you need them or not.
The starting age for RMDs is 70 1/2. Once you reach that age (and every year after), you must start withdrawing from your account. The next logical question is what account(s) do you need to withdraw from. The IRAs that are affected are traditional plans, SEP IRAs and SIMPLE IRAs. If you only have a Roth IRA, don’t worry, you don’t need to take RMDs since you’ve already paid the taxes on any money you contributed to the plan. Also, if you have a traditional 401(k) or 403(b) plan through work, you must take RMDs from those as well. The only exception is if you’re still working at age 70 1/2 and funding the plan.
When is the deadline for taking your RMDs each year? Typically, you have until December 31 to fulfill your requirement. However, for your first withdrawal, you have a little more time: April 1 of the year after you turn 70 1/2. Therefore, if you turned 70 1/2 in 2013 and have not taken your RMD, you must do so by April 1, 2014 (not April 15!). Further, if you waited to take your first distribution until now, you must take two distributions for the year: the one from last year plus the one for this year.
How much are you required to take? This is not a set amount and is different for everyone. To figure out your RMD, you need to take your prior year-end account balance(s) and divide that by the life expectancy factor outlined in IRS Publication 590. You must calculate and distribute the correct amount each year. (It’s best to consult with a tax expert to make sure you are paying the right amount.) For example, if you are 70 years of age (which is a life expectancy factor of 17.0) with $100,000 in a traditional IRA, your RMD would be $5,882 ($100,000/17.0). Note that this is the minimum amount; you may take more than that if you wish.
What if you have multiple IRAs? If you have more than one IRA, you must contribute the RMD for each account, but you do not have to withdraw from each of them. You may choose to distribute your entire RMD from one account. This way you can choose to take funds from under-performing accounts rather than those that are doing well.
Failure to take your full RMD by the deadline will result in a stiff penalty. Any amount that should have been withdrawn but was not will be subject to a 50% penalty. This penalty will continue until it’s remedied. Obviously, missing the deadline entirely will result in the penalty, but also if you make a calculating error and take too little, you’ll also be hit with the penalty.
Like any other IRA distribution, RMDs are taxed at ordinary income tax rates. Therefore, it might be better to withdraw more money when your tax rate is lower. For example, you take a year off to travel but plan on returning to the workforce later on.