End of Year Financial Move:
Taking Your Required Minimum Distributions
To save yourself from dire penalties, headaches and stress, be sure you understand the rules for taking annual Required Minimum Distributions (RMDs). The IRS makes it sound very complicated. This is a simplified version (I hope)! Find out if taking RMDs applies to you.
What types of accounts require RMDS to be taken?
RMDs generally apply to accounts that hold money that has never been taxed and grows tax-free. These include:
- Traditional IRAs (not Roth IRAs)
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- profit sharing plans
- Other defined contribution plans
- Roth IRA beneficiaries
In general, the IRS taxes you on money that has not been previously taxed. Their goal is for you to withdraw and thus pay taxes on all of this money before you die. Keep in mind that it doesn’t mean you have to spend the withdrawals. They can be reinvested elsewhere.
Who must take RMDs annually?
Account owners. You must start taking your distribution by April 1st of the year after the year in which you turn 73. Different rules may apply for retirement accounts when you retire, depending on your plan. In subsequent years, the RMD must be taken by December 31st.
Account beneficiaries. The rules for beneficiaries are more complex and depend on the relationship to the account owner and when that person dies.
How much should I take out?
Your RMD for a given tax year, is based on the value of the account on December 31st of the prior year. The amount is determined by your age and the IRS table:
- Uniform Lifetime Table – for all unmarried IRA owners calculating their own withdrawals, married owners whose spouses aren’t more than 10 years younger, and married owners whose spouses aren’t the sole beneficiaries of their IRAs
- Table I (Single Life Expectancy) is used for beneficiaries who are not the spouse of the IRA owner. You will likely have to take this distribution fully by the 10th year after the death of the owner, but there are mitigating circumstances.
- Table II (Joint Life and Last Survivor Expectancy) is used for owners whose spouses are more than 10 years younger and are the IRA’s sole beneficiaries.
You simply divide the end-of-year account balance by the value in the appropriate table that corresponds to your age. This gives you the amount to distribute and pay tax on. IRS Pub 590-B has a worksheet that might also help you.
What if I goof?
If you neglect to take your RMD on time, or do not withdraw enough, you will be subject to a penalty on the amount due of 10% in the first two years, and 25% if it goes longer.
Need Help?
Most brokerage firms will distribute your RMD annually or periodically, if you request them to do so. This ensures that you never get penalized. Your CPA can help you determine this number as well and both advisors should be able to help you plan for the tax consequences. Daily Money Managers, like those of us at Paper Tigress, check client’s accounts to make sure that RMDs get taken each year when appropriate.
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