Answers About Required Minimum Distributions

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Answers About Required Minimum Distributions

As we talk with people, we find a lot of confusion around the required minimum distribution (RMD) rules. What is the RMD and how does it affect you?

The RMD primarily applies to retirement accounts like an IRA, 401K, or 403B. Since the money in those plans has never been taxed, the IRS requires a minimum distribution starting the year after a person turns 70.5 years old (we’ve never heard a good reason why the half year is part of that equation). The distributions are taxed as ordinary income, on which you must pay taxes. Technically, you have until April 1st of the next year after you turn 70.5 years old to take the first distribution, but most people don’t wait because they would then have two RMD’s that next year.

To calculate the RMD, you take the account balance on December 31st of the previous year and a “life expectancy” factor that the IRS provides. For instance, if your IRA was worth $120,000 on 12/31/2016 and you turned 70 in January of 2017, you would use the factor provided for a 70-year-old as follows: $120,000 ÷ 27.4 = $4,380.

That means you’d need to withdraw at least $4,380 by 12/31/2017, or face a very stiff 50% penalty from the IRS on the amount you didn’t withdraw (and be forced to take the distribution anyway!).

As with anything related to taxes…why be simple when you can make it complicated? There are several rules and exceptions, and the following are a few that might affect you.

First, are you still working at 70.5? You don’t have to take a RMD from the 401K or 403B that you have with your current employer. But, if you have an IRA or another old 401K, you must take RMD’s from those.

Second, along those same lines, if you have several IRA accounts (including a SEP or SIMPLE IRA), you add them all up for the calculation, but can take the distribution from just one account or any of them. However, that’s not true for all types of retirement accounts, and 401K or 403B RMD’s must be calculated and distributed separately.

Third, are you married to someone more than 10 years younger than you? You use a different type of life expectancy factor (Joint Life) which allows the distributions to be smaller.

We have also been seeing inherited retirement accounts more and more. For those, the RMD starts the year after the deceased person passes away and the account is inherited, no matter the age of the inheritor. Inherited Roth IRA’s also require RMD’s, where a standard Roth IRA does not. There’s a third factor type (Single Life) which lets the distributions be spread out even longer. And, inherited accounts cannot be commingled with your own retirement accounts.

For our clients, we usually calculate and withdraw the RMD’s toward the end of the year. The amount can be withdrawn all at once or throughout the year. So, some clients take a monthly distribution as part of their regular income.

Additional questions about the required minimum distribution and your situation? Email info@eclecticassociates.com or give us a call at 714-738-0220 and we will be glad to help you.