Just a quick reminder for those of you who have made it to or beyond the youthful young age of 70 ½ this year… The IRS WANTS ITS MONEY!
We want to go over frequently asked questions regarding Required Minimum Distributions (RMDs).
WHAT IS AN RMD?
An RMD is a distribution individuals must take from their “retirement” account(s). If you have a retirement account and are older than 70 ½ by the end of the year, the IRS requires you to pay some taxes on your monies. The IRS doesn’t want you to defer paying taxes forever, therefore they impose a required minimum distribution.
WHEN DO I NEED TO TAKE MY RMD?
For the majority of retirees, RMDs are due by the end of the year. However, in your first year of taking RMD’s (the year in which you turn 70 ½), the IRS allows you a deadline of April 1st of the following year. To minimize taxes, we normally suggest clients start taking distributions from their IRA the same year they turn 70 ½. That way, the following year, they don’t have 2 RMDs in the same year which could move them up into a higher tax bracket.
I HAVE MULTIPLE RETIREMENT ACCOUNTS, WHAT DO I DO?
If you have multiple different retirement accounts, an important thing to ask is what type of retirement account is it? Most retirees use “traditional IRAs” as the final resting place for monies that they’ve deferred paying taxes on for years (which has been a great advantage!). The type of accounts used to defer are all very different (401k, 403b, 457, TSA, RSP, etc...) but once rolled into a traditional IRA they’re all viewed as the same and under the same rules. Essentially, it doesn’t matter which IRA distributions come from, you can tally up all the “IRAs” together and take the appropriate amount from just one account. On the other hand, if you still have monies inside a 401k, 403b, RSP, TSA, 457, etc., the IRS doesn’t allow a simple blanket approach – there needs to be separate distributions from each of the different types of retirement accounts.
HOW IS AN RMD CALCULATED?
An RMD is calculated using two numbers. One is the balance of your IRA from the end of the previous year (for 2017 see balance on December 31, 2016). The second number is provided by the IRS’s ‘uniform life table’ (provided here). See the hypothetical example below:
Example: Cosmo Kramer’s Year-end balance in his Traditional IRA is $100,000, he is 74 years old. The Uniform Life Table amount for someone age 74 is 23.8. So $100,000/23.8= $4,201.69. Another way to look at this example is for someone age 74, they must distribute approximately 4.2% of their IRA before the end of the year.
Please note it doesn’t matter when during the year this distribution occurs, it can be monthly, annually, etc.
IMPORTANT TIP: If your spouse is more than 10 years younger than you, a special Uniform Life Table is used because your money is going to need to last longer, so the divisor is adjusted to be a little lower.
CALL US WITH QUESTIONS
Hopefully this is helpful. However, if you have questions, don’t hesitate to give us a call.