What You Need to Know About RMDs - Rodgers & Associates
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What You Need to Know About RMDs

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This week’s newsletter is a contin­u­ation of a series on planning for retirement that I started earlier in the year.

See the other posts in the series here:

Planning for retirement involves both the expected and the unexpected and there is much uncer­tainty surrounding the future. Inflation, taxes, health care costs, and investment decisions are all part of the process. I’ve been keeping track of some of the most frequent questions we hear and have been including them in this series.

When am I required to withdraw money from my Tradi­tional or Rollover IRA? You must begin taking money from your IRA at age 70 ½ but there are excep­tions. The rule for required minimum distri­b­u­tions (RMDs) requires the first distri­b­ution to be taken by April 1st of the year following the year the IRA owner reaches age 70 ½. The person whose 70th birthday is on July 1, 2013 turns 70 ½ on January 1, 2014 and must take their first RMD by April 1, 2015. The twist on this rule is that if they waited until the first quarter of 2015 to take the first distri­b­ution their second distri­b­ution would be due by December 31, 2015. For tax planning purposes they may not want to take two distri­b­u­tions in the same tax year.

How do I calculate the amount of the RMD that I must withdraw? The Internal Revenue Service has issued proposed regula­tions substan­tially simpli­fying the calcu­lation of minimum required distri­b­u­tions from qualified plans, IRAs, and other related retirement savings vehicles. The calcu­lation is based on the following factors:

Consulting with a tax and/or financial adviser is extremely important for many investors when deter­mining who should be named as your benefi­ciary and what methods should be elected in calcu­lating the required minimum distri­b­ution. Additional infor­mation can be found in the Internal Revenue Service Publi­cation 590 (PDF).

When am I required to withdraw money from my Roth IRA? Roth IRAs are not subject to RMDs during the owner’s lifetime. RMDs for the benefi­ciary are required after the death of the owner. A surviving spouse can rollover the Roth IRA to their own name and avoid RMDs. The spouse effec­tively becomes the new owner of the Roth IRA. All other benefi­ciaries will have to take out the entire balance by December 31st of the fifth year after the owner’s death or start taking distri­b­u­tions over their life expectancy starting no later than December 31st of the year following the year of the owner’s death.

Do tax-deferred annuities have required withdrawals at a certain age? Annuities are subject to the same RMD require­ments if they are held inside an IRA. Nonqual­ified annuities (those held outside a retirement account) generally have no requirement to withdraw your funds at any age unless required by the annuity contract itself. Some contracts force distri­b­u­tions or annuiti­zation to begin at a certain age, generally from age 85 to 100. A few contracts do not require distri­b­ution of the proceeds until death.

What if I forget to withdraw the minimum amount at age 70½, or I make a mistake on my RMD and do not withdraw enough? The penalty is 50% of the “under-withdrawal,” the difference between what you withdrew and what you should have taken out to meet the Required Minimum Distri­b­ution. Your IRA custodian firm should have systems in place to assist you in deter­mining the dates and amounts you should withdraw from your IRA.

The same penalty applies if minimum distri­b­u­tions are not taken from inherited IRAs. The rules are a little trickier with inherited IRAs and the benefi­ciary has options to choose which affect the RMD. You should consult a tax profes­sional or financial adviser experi­enced with handling inherited IRAs to evaluate the best distri­b­ution options for your situation.

See the other posts in the series here:

Rick’s Tips:

  • RMDs are required from IRAs and other qualified retire plans once you reach age 70 ½.
  • Roth IRAs are exempt from RMDs until after the owner’s death.
  • Nonqual­ified annuities generally don’t have distri­b­ution require­ments except as required in the contract.