When do I take a required minimum distribution?
After years of working and contributing to a retirement plan, you’re finally ready to retire and start using the money you’ve worked so hard to save. Although you’ll generally be free to determine how much you want to withdraw, you will have to take at least a little each year from your retirement accounts once you reach age 70½. The amount you’re required to take is known as your required minimum distribution, or RMD.
What kinds of accounts have RMDs?
Almost every kind of retirement savings program (except Roth IRAs) has a distribution requirement for the account holder. This includes savings plans offered by employers, such as 401(k), 403(b), 457, and SIMPLE plans. It also includes any traditional IRAs you may have set up on your own.1
When do I have to start taking RMDs?
In most cases, retirement account owners are expected to start taking annual RMDs when they reach age 70½.2 You’ll have until the end of each year to take your RMD. There’s a three-month grace period on the deadline for the first RMD you take out, until April 1 of the year after you turn 70½.
How much do I have to take out each year?
As a general rule, your RMD amount is determined by your current age and the balance that was in your account at the end of the previous year.3 Although your plan may tell you what your RMD is for the year, it is ultimately your responsibility to figure out how much you need to take and request that amount be distributed to you that year.
To help you figure out how much to take in RMDs, the Financial Industry Regulatory Authority has an online tool that can crunch the numbers at http://tools.finra.org/rmd. Or, you can have your tax advisor help you with the calculation.
What if I have multiple retirement accounts?
If you have more than one retirement account, you’ll need to take separate RMDs from each, except if you have more than one 403(b) or 457(b) plan. In that case, you can combine like plans into one RMD. For example, if you have two 403(b) plans, you can calculate the RMD from each, add the amounts together, and take the RMD from either 403(b) account. Same goes for 457(b) plans. But not 401(k) plans – each one will need it’s own RMD.
Are there penalties associated with RMDs?
If you don’t take an RMD, you’ll have to pay an extra penalty equal to 50% of what you would have taken out. So, basically, you’re giving the IRS half of your distribution if you don’t take it out on time.
Keep in mind that you’ll have to report taxable distributions from your retirement accounts on your income tax returns. That means, for most retirement plans, you’ll need to report your entire distribution each year as income (because you haven’t paid taxes on either your contributions or the earnings). If you are unsure of the tax consequences of your retirement plan distributions, you should consult a qualified tax advisor.
1Although owners of Roth IRAs do not have to take RMDs during their lifetimes their beneficiaries will have to take RMDs as long as they live.
2Employer-sponsored retirement plans may allow those participants who continue to work past age 70½ and do not own more than 5% of the company to delay taking RMDs until their actual retirement. This option is not available for assets held in IRAs.
3A different formula may be used to calculate RMDs when a spouse is the sole beneficiary for the original account owner and is also more than 10 years younger.
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