What You Need to Know About RMDs

Posted on

Dollar Sign and Question MarkThis 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.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437