Clearing The Confusion About RMDs - Rodgers & Associates

Clearing The Confusion About RMDs

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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 That distri­b­ution covers 2012 and must be withdrawn from the IRA by April 1, 2013.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.