Lately, we’ve been talking about IRAs, the one tax-advantaged retirement savings account that isn’t employer-sponsored. Anyone with an income, or a spouse with an income, is eligible to invest in an IRA.
When IRAs were first introduced, the IRS wanted to make sure they were actually used for retirement savings and not just a way to defer taxes indefinitely. Because of that, they have required minimum distributions (RMDs).
What Is A Required Minimum Distribution?
An RMD is an amount that you are required to withdraw from your account annually after reaching age 70 ½. Traditional IRAs have RMDs, but Roth IRAs do not for the original account owner. Only the beneficiary of an inherited Roth IRA is subject to RMDs.
With IRAs, unlike employer-sponsored retirement plans, you have to start taking RMDs even if you’re still working. Employment status does not affect RMDs.
When Do I Have To Take Them?
Your first RMD must be taken the year in which you turn 70 ½, or by April 1 of the following year. For every year after that, the RMD must be withdrawn by December 31.
Let’s say you were born February 1, 1950. You will turn 70 ½ on August 1, 2020. Therefore, your first RMD should be taken in 2020 but can be postponed until April 1, 2021, at the latest. Your second RMD must be taken by December 31, 2021, third by December 31, 2022, etc.
How Much Is My Required Minimum Distribution?
RMDs are calculated by taking the previous December 31 account balance and dividing it by a life expectancy factor. The IRS has different life expectancy tables for different situations.
The Joint and Last Survivor Table is used when your spouse is the sole beneficiary of the account and more than 10 years younger than you. The Uniform Lifetime Table is for people whose spouses are closer in age or not the sole beneficiary. The Single Life Expectancy Table is for beneficiaries of inherited accounts.
For example, if both you and your spouse are 70 this year, your life expectancy factor is 27.4. If your IRA had $548,000 on December 31, 2016, you would divide that amount by 27.4 to get $20,000. That is your RMD for 2017. You would need to do the 2018 calculations after December 31, 2017.
RMDs must be calculated individually for every IRA you own. However, you can withdraw the entire RMD out of only one account if you want. The total amount that is withdrawn is what matters, not which account it is taken from.
Many IRA custodians will figure your RMD for you. However, it is ultimately the account owner’s responsibility to take the correct distribution or face penalties.
What Happens If You Don’t Take A Required Minimum Distribution?
There is a steep penalty if you don’t take your RMD, only take part of it, or don’t take it by the deadline. The amount that is not withdrawn is taxed at 50%. So, if you were required to take the $20,000 mentioned above, but only withdrew $10,000, you would owe $5,000 in taxes. ($10,000 not withdrawn x 50% = $5,000)
If you can prove that your failure to withdraw the proper amount on time was due to reasonable error and you’re working to fix your problem, the IRS may waive your penalty. You have to file a special form with a letter of explanation in order to apply for relief from the RMD penalty.
Does It Work The Same For Beneficiaries?
The rules change a little bit for inherited IRAs. Beneficiaries of both kinds of IRAs, traditional and Roth, are subject to RMDs.
If you inherit an IRA, you have the option to take a distribution of the full amount within 5 years of the owner’s death, or stretch out the distributions over your own lifetime. If you choose to take distributions over your entire lifetime, they must start within one year of the account owner’s death.
How I Can Help
If you have further questions or need help calculating your RMD, I’d love to meet with you. Give me a call at (717) 283-4186 or email me at firstname.lastname@example.org to schedule a complimentary “Get Acquainted” meeting where I can answer all of your questions.
David Niggel, CFP®, ChFC®, AIF® is the founder and president of Key Wealth Partners, LLC, an independent wealth management firm serving individuals, families, and business owners. Along with over a decade of financial services experience, he has advanced knowledge and training in providing holistic financial planning with fiduciary and ethical care, holding the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Accredited Investment Fiduciary® certifications. With hands-on entrepreneurial experience, he has the unique ability to help clients meet both their individual and business goals. Based in Lancaster, he serves clients through the York, Harrisburg, Hershey, and Central, Pennsylvania areas. Learn more by visiting www.keywealthpartners.com or connecting with David on LinkedIn.