The key to Required Minimum Distributions (RMDs) is to know what they are and how they could affect you. Failing to act could result in significant penalties. Here are a few of the basics:
- Taxpayers are mandated to begin taking taxable withdrawals from their IRAs and 401(k)s in the year they turn age 70 ½.
- Taxpayers have until April 1 of the year following the year they turn 70 ½ to take their first RMD and then the deadline is December 31 for all future years.
- Only 401(k)s give taxpayers who are still working at age 70 ½ the option to postpone their withdrawals until April 1 after the year they retire.
- The minimum amount required to be drawn fluctuates from year to year because it is calculated by dividing the fair market value of the retirement account on the last day of each year by an IRS estimate of the taxpayer’s life expectancy.
- If the taxpayer’s spouse is more than 10 years younger and the sole beneficiary, than the spouse’s life expectancy must also be taken into consideration when calculating the annual RMD.
RMDs are not just limited to those that hold the retirement accounts. Any individual who inherits a retirement account must also consider whether they are subject to an annual RMD. If a spouse inherits the account, they may treat the funds as if they were their own, therefore only requiring a RMD if they are 70 ½ or older. However, any non-spouse beneficiary must begin taking their RMD the year following the death of the account owner. The non-spouse beneficiary’s annual RMD amount is based on the longer of the beneficiary’s life expectancy or the deceased account owner’s life expectancy. It is important for retirement account holders to designate a beneficiary. For tax planning, it is crucial for all IRA owners to elect a designated beneficiary because non-designated IRA accounts must be 100% distributed within five years of the owner’s death, thus losing all tax deferred advantages. Some people don’t realize they have to take distributions or decide to let it sit in the account because they don’t ‘need’ the funds at that time. Unfortunately, the fines are hefty for failing to take an annual RMD so the most important thing is to ensure that you take the distribution. Any amount of an RMD that is not distributed by the deadline is subject to a 50% penalty. Many retirement fund providers set their clients up with monthly, quarterly or annual direct withdrawals from their retirement accounts to avoid these penalties. For additional information, please contact your tax professional to review your specific situation.