Clearing The Confusion About RMDs

Some helpful examples.

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A lot of people get confused when it comes time to taking minimum distributions from an IRA or other qualified account. The rule states required minimum distributions (RMDs) must begin by April 1st of the year following the year in which the IRA owner reaches age 70 ½. This applies to traditional IRAs, SEPs, and SIMPLE IRAs. There is an exception for RMDs from employer sponsored plans, such as a 401(k) or 403(b), known as the “working rule”. Those who are still working for the company where they have a retirement savings account can delay their beginning withdrawal date until April 1st of the year following the year that they retire.

Part of the confusion comes from the 70 ½ birthday. We remember our actual birthday and not our ½ birthday. If you were born on June 30, 1942, you will turn 70 ½ on December 30, 2012 and must take your first RMD by April 1, 2013. Anyone born on July 1, 1942 doesn’t turn 70 ½ until January 1, 2013, which pushes the deadline out to April 1, 2014. What a difference a day makes.

The other confusing aspect of this rule is the April 1st deadline. An IRA owner that turns 70 ½ in 2012 can wait until 2013 to take their first distribution. That distribution covers 2012 and must be withdrawn from the IRA by April 1, 2013. However, they will need to take another distribution by December 31, 2013 to cover the RMD for 2013. It is important to run tax projections to see what the tax impact would be to taking two distributions in the same year versus spreading them over two tax years.

The last quirk about taking RMDs is that it doesn’t matter when you take the distribution during the year. If you turn 70 ½ on June 30th, you could take the distribution in January before you actually turn 70 ½. This is not true with the rule for taking penalty free withdrawals from an IRA at age 59 ½. You must wait until you actually turn 59 ½ to avoid the penalty.

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