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Required Minimum Distributions

What are required minimum distributions?

Required minimum distributions, also known as RMDs, are the amounts that the government requires you to take each year from your Traditional IRAs and employer sponsored retirement plans, such as a 401k, after you reach the age 72. The RMDs are formulated to spread out the distribution of your IRA or employer plan over your life. The reasoning behind RMDs is that the government wants to make sure that people don't keep accumulating their accounts and deferring taxes by passing the accounts down as an inheritance. The government wants to get their money, so RMDs force you to take a distribution which then produces you to have taxable income. You can always take more than the minimum amount from your accounts, but if you take less than the minimum, you will be subject to a penalty.

When do you need to take RMDS?

Your first required minimum distribution is in the year you reach age 72. Your first distribution can be delayed until April 1 of the year after you turn 72, but by delaying your distribution into the next year, you are then required to take 2 distributions within the same year. After that, your distributions need to be taken by December 31st of each year. If you fail to take the RMD for the year, you will subject to a federal penalty of 50% excise tax on the amount the RMD exceeds the distribution you actually took. For example, if your RMD for the year is $5,000 and you took a distribution of $3,000, you are short $2,000. Since you are short, you owe a penalty of 50% of the amount you are short, which would be $1,000. 

How do you calculate an RMD?

RMDs are calculated by using the balance of your account from December 31st of the previous year, and dividing that by a life expectancy factor. The life expectancy factor for RMDs is determined by the IRS. This RMD Worksheet helps to determine your RMD. If you have multiple Traditional IRA accounts that require an RMD, each account will have their own calculated RMD. But, even though each account has their own calculated RMD, you can take your overall total RMD from any one or more accounts. If you participate in more than one employer retirement plan, your RMD is calculated separately for each plan and must be paid from that plan.

RMDs from an Inherited IRA

If you have an inherited IRA, you are required to take distributions from that account which is usually based off of the original owners birthday and date of death. If you inherit your spouses's IRA, you are able to roll that over into your own IRA account and take the distributions from your account just like you would typically do when you reach age 72.

Taxes from your RMDs

RMDs are subject to federal income tax for the year you receive the distribution. The amount of tax will depend on if you ever made after-tax contributions to your IRA or plan. The RMD is taxed at ordinary income tax rates.

Learn more about what you need to know when it comes to your required minimum distributions. If you still have questions or would like to talk to a financial professional, reach out to Peter O'Brien today.