United States: For Good Financial Health, Take Your RMDs

Last Updated: October 12 2017
Article by Dan Newman

Employer-sponsored retirement plans and traditional IRAs offer participants almost unbeatable tax-saving and wealth-building opportunities. However, the benefits come with a catch. At a certain point, you have to stop investing and start withdrawing in the form of required minimum distributions (RMDs) or pay a severe price.

Note What Qualifies

The magic number is 70˝. After you reach that age, you must begin taking RMDs. If you do not, the IRS applies a penalty based on the difference between what you should have taken and what you actually took — a whopping 50% penalty. RMD rules apply to 401(k), 403(b) and 457(b) plans, SIMPLEs and traditional IRAs, including Simplified Employee Pension (SEP) plans. The regulations do not apply to Roth IRAs, provided you are the original owner of the account and did not inherit it. So, if you have a Roth 401(k), Roth 403(b), or Roth 457(b), you can avoid RMDs by rolling the funds into a Roth IRA.

Calculate Withdrawals

To calculate the minimum amount you must take from your retirement accounts each year, you divide your balance at the end of the previous tax year by the applicable IRS divisor. Your RMD will vary with the balance in the account, your age and possibly your spouse's age.If your retirement funds are spread across multiple accounts, you will need to figure out your RMD based on the balance in each. So, for example, if you have three IRA accounts with $25,000 in each, your RMD must include all three balances. You can take the distribution from any or all of the IRA accounts, as long as the amount is at least equal to the RMD. However, RMDs from other accounts, such as 401(k) plans, are determined separately. Also, do not forget that your RMDs generally are taxed for the simple reason that the funds have been saved through tax-deferred accounts. However, if a distribution portion is a return of basis, then it will be tax-free. For example, nondeductible contributions to a traditional IRA, or a qualified distribution from a Roth 401(k), Roth 403(b) or Roth 457(b).

Mark Your Calendar

Most account owners must take their initial distribution by April 1 of the year after they turn 70˝, though they can take it during the year in which they actually turn 70˝. However, waiting until the following year to take your initial distribution may have negative ramifications. Because you will then be required to take two taxable distributions within the same year, you may end up in a higher tax bracket. What is more, the amount of the second distribution must be calculated using the account balance from December 31 of the previous year — not based on the balance remaining after the first RMD is taken. As a result, the RMD will be slightly larger, increasing the chance you will be pushed into a higher bracket. After the initial RMD, you will need to take subsequent ones by the end of each calendar year. The IRS allows distributions to be taken in installments during a calendar year, so long as the total by the end of the year equals the RMD. Of course, you are free to make withdrawals in excess of your RMD. This will reduce the balance used to calculate your RMD in future years. But keep in mind that the excess over the RMD you withdraw one year does not count toward your RMD in another year.

Make Good Decisions

If you are like most retirees, you have multiple sources of income and it can be hard to decide which accounts to tap first. Just remember that, after 70˝, you must start taking RMDs from deferred-tax retirement accounts. To help ensure that you are making good retirement income decisions specific to your situation, consult your financial advisor or call us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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