If you have a retirement account such as a traditional IRA or a 401(k) you typically are required to begin taking distributions from the plan at the age of 70 ½. These distributions, commonly referred to as required minimum distributions or “RMDs”, provide for a stream of income to a retiree.
The amount you must withdraw is based on your age and the account balance at the end of the previous year. Failure to take your RMD triggers a 50% penalty.
For example: Betty will turn 70 ½ in January 2018 and had $400,000 in her IRA at December 31, 2017. By referring to the IRS “Uniform Lifetime Table” for the age of 71 (the age she will turn in 2018) she finds a distribution period of 26.5 years. The balance in her account of $400,000 is divided by 26.5 to determine her RMD for 2018. Betty must withdraw at least her RMD of $15,094 in order to avoid a penalty. Each year Betty must make a new calculation based on her age and balance in her account to determine her RMD.
As long as you are over 59 ½ you can take more than the RMD from your accounts without incurring early withdrawal penalties. However, there are benefits to taking only the RMD. Withdrawing just the RMD from your account using the IRS tables will never deplete your account as the RMD calculation serves as a built in adjustment for market successes and pullbacks. Taking only the RMD also keeps your tax bill lower.
Typically RMDs from traditional IRAs are fully or mostly taxable. Depending on their circumstances, a taxpayer may want to have taxes withheld from the distributions or may need to make quarterly estimated tax payments to cover the tax.
Contact Us to find out more about required minimum distributions and planning for their tax consequences.