Get to Know Required Minimum Distributions
SEE ALSO >>> Estate & Trust
The oldest members of the Baby Boomer generation — Americans born between 1946 and 1964, according to the U.S. Census — turned 70 in 2016. This means that, in 2017, many will need to start taking required minimum distributions (RMDs — RMDs also are known as minimum required distributions, or MRDs) from their retirement accounts.
The government requires owners of many retirement accounts to take RMDs by April 1 of the year after they turn 70½. For subsequent years, the RMD must be taken by December 31. This means an account owner that defers the RMD to the year after turning 70½ will have two required distributions that year — one by April 1, and one by December 31.
RMD regulations apply to most owners of IRA, SEP IRA and SIMPLE IRA retirement plans, as well as to many owners of employer-sponsored retirement plans, such as profit-sharing and 401(k) plans. The use of RMDs limits the chance that money will sit in these accounts — untaxed — indefinitely.
The RMD calculation typically starts with the adjusted market value of the retirement account as of the end of the preceding year. The account owner divides this by a life expectancy factor set by the IRS and published in one of the following tables:
- The Uniform Lifetime Table. This is used unless the spouse is the sole beneficiary and he or she is more than 10 years younger than the account owner.
- The Joint Life and Last Survivor Expectancy Table. This is used when the sole beneficiary is a spouse who’s more than 10 years younger than the account owner.
- The Single Life Expectancy Table. This is used with inherited IRAs.
What if an individual has several retirement accounts? The rules vary a bit, depending on the type of account. Individuals who own several IRAs must calculate the RMD for each account, but can withdraw the total amount from a single IRA. Owners of most defined contribution accounts typically will need to calculate and withdraw the RMD from each account. (The rules differ for 403(b) accounts.)
With Roth IRAs, RMDs aren’t required until the owner passes away. Owners of many defined contribution plans, such as 401(k) plans, who work past age 70½ can delay their RMDs until they’re retired, if the plan allows and they don’t own 5% or more of the business that sponsors the plan.
Owners of retirement accounts who fail to take the appropriate RMDs can face penalties of 50% of the amount that wasn’t withdrawn, but should have been