Do you participate in an employer-sponsored, tax-deferred retirement plan?
If so, when you reach the age of 70½, you typically must begin yearly withdrawals from your account.
It’s called a Required Minimum Distribution, or RMD.
According to the Internal Revenue Service (IRS), the following are types of qualifying RMD accounts:
- IRA (Individual Retirement Account)
- Simple IRA
- SEP (Simplified Employee Pension) IRA
- Roth 401(k)
Why is there an RMD?
According to Kiplinger, the reason for a required minimum distribution is simple.
For many people, retirement funds accumulate tax-free for years and years – even decades. Finally, Uncle Sam takes his cut.
Retirement account owners pay federal taxes and state taxes, if applicable, on their money as they withdraw it.
It is up to the individual to schedule his or her own RMD. It is not the responsibility of the government or the plan administrator.
What’s more, there are severe financial penalties imposed for failing to make a required minimum distribution from an employer-sponsored retirement account.
Therefore, if you are approaching this milestone in your life, it is in your best interests to understand how the process works.
What is my RMD?
Usually, a retirement account owner has to start taking required minimum distributions the year they turn 70½.
However, for their very first RMD, they may postpone the withdrawal until April of the year following their birthday.
After that first withdrawal, the account owner must make withdrawals each year thereafter.
According to Investopedia, RMDs are calculated by dividing the prior year-end fair market value of the account by the applicable distribution period or the account owner’s life expectancy.
In some instances, you may be able to delay an RMD if you continue to work past 70½.
If you would like a deferral, check with your employer to make sure you are eligible for one.
An exception to the general RMD rule is the Roth IRA. Unlike the Roth 401(k), a Roth IRA account does not require withdrawals until the owner dies.
How much RMD should I take?
You may withdraw more than the required minimum distribution from a retirement account.
It is also possible to take out all of the funds in a qualifying account, if you wish.
If you would rather stick to the minimum amount, visit IRS.gov to verify you have the most up-to-date calculation tools and worksheets.
This is critical because an RMD may vary from one person to another, as depicted in the following scenario.
Say you have an IRA and have named your spouse as the sole beneficiary. He or she is more than 10 years younger than you are.
The RMD will be different than if your spouse is the sole beneficiary of your account and both of you are the same age.
Here is how to calculate a required minimum distribution:
- Write down the account balance as of Dec. 31 of the previous year.
- Find the distribution factor listed on the IRS calculation tables that corresponds to your age on your birthday of the current year. For most people, this factor number ranges from 27.4 all the way down to 1.9.
(As a person gets older, the factor number goes down.)
- Divide the account balance by the factor number to find the RMD.
What if I miss the deadline?
Not withdrawing the minimum amount on a qualified retirement account at the right time can cost you dearly. There is a 50 percent penalty on the portion not taken out.
This example illustrates the consequences:
You are a 72-year-old account owner with an IRA valued at $200,000, who failed to withdraw the $7,813 required minimum distribution.
Now, you may now have to pay the IRS half of the RMD you were supposed to withdraw, or $3,907.
Consult with a professional
As you prepare for life after you stop working, be sure to factor in required minimum distributions on your retirement account or accounts.
You will probably need to take RMDs when you turn 70½. The amount will be based on a number of criteria.
Keep in mind you do not have to sort this all out on your own. An experienced AmeriLife representative can be a big help.
A licensed agent can assist you whether you need to begin an RMD at age 70½, if you have the option to defer the withdrawal, or if there are any other factors that should be considered in your retirement decision-making.
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