By Rosanne Rogé, CSA, RFG, CFP®
Managing Director
A required minimum distribution (RMD) is the amount that traditional Individual Retirement Account (IRA) owners, Simplified Employee Pension (SEP) plans, and other qualified plan participants, such as 401(k) plan participants, must begin taking from their retirement accounts. This must be done by April 1 following the year they reach age 70 ½. Some qualified plans allow certain participants to defer beginning their RMDs until they retire, even if they are older than age 70 ½, provided they are still working at the company. Roth IRAs do not require withdrawals until after the passing of the owner.1
The rules and regulations surrounding RMDs can be a bit confusing, so we have outlined a few main facts:
- The reason for the RMD rules is that the government provided the retirement account holder with an incentive to save for retirement by offering a tax deduction or tax-deferred growth on the retirement account. If the government did not enforce some distribution requirements, some people might put all their earnings in an IRA and never take it out, leaving the government without a major source of tax revenue.
- RMD amounts must be distributed based on the December 31st account value of the previous year, and the life expectancy factor.
- The first year following the year you reach age 70½, one will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). It’s a good practice to take the distribution in the year you turn 70 ½ so that two distributions are not required in the same year, which could place you in a higher tax bracket.
- For IRA holders, their date of birth will determine when the first RMD must be taken. IRA holders are also able to aggregate the RMDs and can come from any one or combination of IRA accounts.
- For 401(k) and other qualified retirement account holders, the plan documents will dictate when the RMD must be taken. An RMD must be taken from each employer plan that you might have. For example, if you have one 401(k) and a 403(b), you would need to take two separate distributions – one from the 401(k) and one from the 403(b).
- Failing to take a timely and/or accurate RMD can cause a 50% excise tax on the amount not distributed as required.
Since there are so many rules and variations of information depending on your specific retirement account, it would be a good practice to work with a trusted professional, such as your financial advisor, to ensure your RMDs are properly taken.
To discuss your financial future with a knowledgeable senior wealth advisor, please contact us and schedule a complimentary consultation at 631.218.0077 or at info@rwroge.com.
