You can’t keep money in your pre-tax retirement accounts indefinitely. The IRS requires that you begin to withdraw money from these accounts (Traditional IRA, SEP IRA, SIMPLE IRA, or employer’s retirement plan account) and pay the appropriate taxes after you turn 70½.
The minimum amount you must withdraw from your account each year is called the required minimum distribution (RMD). You must take your first RMD by April 1 of the calendar year following the year you turn 70½. Thereafter, you must take your RMD by December 31 each year.
The RMD is the minimum amount you must withdraw; you can always withdraw more from your accounts than the RMD. Withdrawals will be taxed as ordinary income, except for any money in your IRA that was non-deductible, which is considered a return of principle.
How to calculate your RMD
The required minimum distribution is calculated by dividing the account balance as of December 31st of the immediately preceding calendar year by a distribution period from the IRS’s “Uniform Lifetime Table.” For each age between 70 and 115, the Uniform Lifetime Table provides a distribution period. For example, at age 70, the distribution period is 27.4. If your IRA account balance was $100,000 at the end of the preceding calendar year, then you would be required to take an RMD of $3,649.64 in the current year ($100,000 / 27.4 = $3,649.64). Many RMD custodians calculate your annual RMD for you, but it’s your responsibility to ensure it is correct.
When do I have to take my first RMD?
You turn 70½ on the date that is 6 calendar months after the date of your 70th birthday.
Example: Your 70th birthday was June 15, 2017. You will reach age 70½ on December 15, 2017. You must take your first RMD (for 2017) by April 1, 2018. Example: Your 70th birthday was July 1, 2017. You will reach age 70½ on January 1, 2018. You must take your first RMD (for 2018) by April 1, 2019.
When do I have to take subsequent RMDs?
After the first RMD, you must take subsequent RMDs by December 31 of each year beginning with the calendar year containing your required beginning date.
Example: You turn 70½ on July 15, 2017. You must take your first RMD, for 2017, by April 1, 2018. You must take your second RMD, for 2018, by December 31, 2018, and your third RMD, for 2019, by December 31, 2019.
Do I need to take my RMD if I am still working?
You must take RMDs from your IRA, SEP-IRA, or SIMPLE IRA by April 1 of the calendar year following the year you turn 70½ whether you are working or not. If you are still employed at 70½, then you must take your RMD from your employer’s plan the later of the year you turn 70 ½ or the year you retire (if allowed by your plan). This means that while you are still working, you will not have to take any RMDs from your employer’s 401(k), 403(b), or other retirement plan, if the plans allow. However, if you are still working and have both an employer’s retirement plan, such as a 401(k), and an IRA, you will need to take an RMD from your IRA even if you don’t have to take one from your 401(k).
What happens if I don’t take my RMD?
The penalties for not taking your full RMD are severe, so you want to be careful to take the full amount. If the distributions to you in any year are less than the RMD for that year, you are subject to an additional tax equal to 50% of the undistributed RMD.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.
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