My aunt is turning 70 1/2 this year. Congrats! For those of you familiar with IRAs and 401ks, you know it’s a magical number because it’s time to start Required Minimum Distributions (RMDs).
If you have multiple accounts at various places, the RMD rules can get a little tricky to navigate. Let’s walk through the rules of RMDs and how to calculate the RMDs for your retirement accounts.
What is a RMD?
A Required Minimum Distributions (RMDs) is the minimum you must withdraw from your retirement plans each year. You can withdraw more than the minimum, but not less.
RMDs start the year you turn 70 1/2 for IRAs. It’s important that you understand how to calculate the RMDs, and that you take them, because you (not the employer or the broker where the account is) are responsible for taking the correct amount every year.
If you fail to take an RMD the penalty is 50% of the amount you didn’t withdraw (in addition to the regular income tax on the amount)! Ouch!
Which plans require RMDs?
The retirement plans that require minimum distributions are:
- Employer plans: 401ks, Roth 401ks, 403b, 457s, and profit sharing plans.
- IRAs: Traditional IRAs, SEPs, SARSEPs, and Simple IRAs.
The RMDs do not apply to Roth IRAs while you are living.
When do you take the first RMD?
You must take your first RMD for the year your turn 70 1/2. You can take it either by the end of the year or by April 1 of the following year. Then all of the rest of the RMDs must be taken by December 31 each year.
Let’s work with an example (because examples make much more sense!). Let’s say you were born in January, like my aunt. That means she’ll turn 70 1/2 in July this year. She’ll need to take her first RMD by December 31 this year or delay it until April 1, 2013. Her second RMD must be taken by December 31, 2013 (whether or not she delayed the first RMD).
Just be aware, that if you wait to take your first RMD until April, you’ll have 2 RMDS that year, which could push you into a higher tax bracket.
If you are still working, you can delay RMDs until the year you retire, if it is later than 70 1/2. This rule doesn’t apply to your IRA or if you are a 5% business owner sponsoring the plan.
How To Calculate RMDs
Some RMDs can be combined across accounts and some cannot. Here’s a breakdown on the rules for each type of account:
- IRAs. You must take your IRA RMD based on the total of all of your IRAs. (Technically, the IRS instructs you to calculate the RMD separately for each IRA, but then allows you to withdraw the amount from any combination of the IRAs).
- 403bs. Just like the IRAs, you calculate the 403b RMDs separately, but you can take the amounts out of any combination of the 403b plans.
- Other Employer plans. For the RMDs in your other employer plans, like 401ks and 457s, you need to calculate and take an RMD separately from each account.
Once you understand which accounts you can combine, the actual RMD calculation is fairly straight forward. To calculate your RMDs:
- Determine the balance of your account for December 31 of the prior year.
- Divide the balance by your life expectancy factor. You can look up your life expectancy factor from the RMD table on the IRS worksheet.
You can also use one of the free RMD calculators to determine the amount of your distribution.
More on RMDs
Married Couples. If you are married, each spouse will calculate RMDs independently.
Death. The rules for RMDs change if the account owner dies. See the RMD inherited IRA rules for beneficiaries in Publication 590.
Beneficiaries. And while we are on the subject, if you are ready to start thinking about death and the impact to your retirement accounts, it’s probably time to check out Ed Slott’s books. I just finished reading Your Complete Retirement Planning Road Map detailing stretch IRAs and setting up your accounts correctly for your beneficiaries. I also checked out one of his other books, The Retirement Savings Time Bomb to read on while we’re on vacation this week!