In the year in which you turn 70 ½ years of age, the current IRS guidelines require you to take a Required Minimum Distribution (RMD), by April 1 of the following year, from your Qualified accounts (tax-advantaged accounts). For each year thereafter, you must take your RMD by 12/31 each year.
The types of retirement accounts impacted by the RMD requirement include, but are not limited to: 401(k), 403(b), 457 plans, Individual Retirement Accounts (IRAs), SEP IRAs, and SIMPLE IRAs. It is important to note that Roth IRAs do not have an RMD requirement while the owner is alive.
The RMD from your Defined Contribution Plans, which includes your 401(k), 403(b), 457 and TSP plans, is separate from the RMD from your IRA, SEP, SIMPLE, and other IRA type accounts. While your IRA RMDs can be combined and taken from one account, your 401(k) and similar account types must have the RMDs taken separately from each account.
How are RMDs calculated? RMDs are calculated by dividing the prior year-end fair market value of the retirement account by the applicable distribution period, or life expectancy. While you must withdraw the minimum amount, you are still legally allowed to withdraw any amount above that number. To calculate your RMD, visit the IRS website to ensure you are using the correct calculation worksheet. Generally, you will need to do three things for each account:
1) Determine the account balance on December 31st of the previous year by account
2) Find the distribution factor listed on the IRA calculation tables corresponding to your age
3) Divide the account balance by the distribution factor number to determine your RMD.
When Should I take my RMD? You will be required to take your RMD from your accounts prior to December 31 each year, except for the year you turn 70 1/2 , when you are required to take the RMD by April 1 of the following year. Failure to take the withdrawal as required may result in a 50% IRS excise penalty on the amount of the distribution you should have taken. The RMD amount is calculated based on the total in the retirement account as of December 31 of the prior year, so even if that account has a zero balance this year, the balance of that account from last year will impact the RMD requirements you have this year.
If you have multiple IRA accounts you may take the aggregate required total from one of the accounts, or the required amount from each account, or any other mixture of withdrawals from those impacted accounts; as long as you satisfy at least the full amount of the RMD as calculated across all accounts. There are valid investment planning reasons why you may want to vary how you take your RMDs from your IRAs.
If actively working beyond 70 1/2, you may be able to defer 401(k)/403(b) RMDs without penalty. Generally, you must take your distribution each year whether you are working or not from your IRA type accounts. However, if you are still actively working past the age of 70 ½, it is possible to defer your Defined Contribution Plan RMSs (such as 401(k)/403(b) accounts) until retirement. As with anything else, conditions apply and require:
• That you are actively employed currently.
• Your current employer sponsors the 401(k) plan in question (a former employer 401(k) requires an RMD after age 70 ½.
• You have funds in the account.
• Your plan allows for it.
• You are not a 5% or more owner of the company. Owners holding 5% or more are required to take RMDs beginning at age 70 ½.
There is, however, a way to prevent the need for an RMD from a plan you have with a prior employer; when still actively working and eligible for a current employer’s plan. If you have more than one 401(k) and your plan allows for rollovers, it may be possible to consolidate all 401(k) funds into the 401(k) of your current employer, allowing you to delay RMDs on all of the funds in the following year, if the other exceptions apply. This will also simplify RMD planning once you retire by minimizing the number of different RMD distributions you must calculate and take.
Additionally, because RMDs are not required from Roth IRAs, conversion of IRA accounts to Roth IRA accounts is another way to potentially avoid the need to take RMDs after age 70 ½.
Inherited IRAs also must have RMDs taken from them. Generally, if you have inherited an IRA from someone age 70 ½ or older, for the year of the account owner’s death, use the RMD the account owner would have received. For the year following the owner’s death, the RMD will depend on the identity of the designated beneficiary. Many other rules apply.
This is a highly simplified overview of RMDs. There are multiple rules to follow, so for these decisions, the input of a financial advisor and/or a tax professional is recommended. To inquire about your situation, please contact our office at 770.931.1414 to schedule a free consultation, or sign up for one of our upcoming retirement planning classes. Learn more at www.rogersgreen.com. We are here to help!
This information is not intended to be tax or legal advice, and it may not be relied upon for the purpose of avoiding any federal or state tax penalties. Roger Green is an Investment Advisor Representative offering securities and advisory services through Cetera Advisors LLC, member FINRA/SIPC. Roger’s office is located at 3700 Crestwood Parkway Duluth, GA 30096.
Roger S. Green is a Registered Representative of Cetera Advisors LLC, member FINRA/SIPC, with his office located at 3700 Crestwood Park-way, Suite 140, Duluth, GA 30096. Visit his website at www.rogersgreen. com for more, including information on the retirement planning classes he has taught for 20 years at Gwinnett colleges.