It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
R is for RMD (Required Minimum Distribution).
Nothing is forever – including retirement accounts. By law, you are required to withdraw funds from your retirement account each year after you reach age 70½ (or the year in which you retire if you retire after that age). That amount is referred to as a required minimum distribution (RMD).
The RMD doesn’t apply to all retirement accounts:
- The RMD rules do apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs but not to Roth IRAs while the owner is alive. Roth IRAs do require withdrawals after the death of the owner.
- The RMD rules do apply to profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans, as well as Roth 401(k) plans.
- The RMD rules do apply to profit-sharing plans (PSP) and other defined contribution plans.
Under the rules, you must take your first RMD for the year in which you turn age 70½. However, you can delay the RMD until April 1 of the year following the year in which you turn 70½ (so, for example, if you turned 70½ in 2015, you must take your first RMD by April 1, 2016). After that time, including the year in which you were paid your first RMD by April 1, you must take your RMD by December 31 of each year.
The RMD is calculated for each of your retirement accounts by dividing the balance as of December 31 in the prior year by your life expectancy. Your life expectancy is calculated by using a factor that IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) (downloads as a pdf) according to the table that best suits you:
- Joint and Last Survivor Table. Use this table if the sole beneficiary of the account is your spouse and your spouse is more than 10 years younger than you.
- Uniform Lifetime Table. Use this table if your spouse is not your sole beneficiary or your spouse is not more than 10 years younger.
- Single Life Expectancy Table. Use this table if you are a beneficiary of an account, typically called an inherited IRA.
While the rules say that you have to calculate the RMD for each IRA or 403(b), you can withdraw the total amount from one or more of those accounts. In other words, so long as the total amount you withdraw matches the total RMD, you don’t have to take out amounts separately from each account. However, that is not the rule for other types of retirement plans, such as 401(k) and 457(b) plans: those require that you calculate and withdraw amounts separately.
Practically speaking, the rules – and the math – can be tricky. Your financial advisor should be able to explain the rules and easily calculate these amounts using software – so be sure to ask before you struggle too much. But remember, you are responsible for your RMD, so if the withdrawal amounts don’t make sense to you or you have questions, be sure to ask how the calculations were determined. Some exceptions and special rules may also apply. You want to be sure to get it right: if you do not take your RMD, or if you don’t withdraw enough, you may have to pay a 50% excise tax on the amount that you didn’t withdraw on time (some exceptions apply).
