What is the Required Minimum Distribution (RMD) Rule for Tax-Deferred Retirement Plans Like IRAs and 401(k)s?

“RMD” is an abbreviation for “required minimum distribution.” This is the amount of money that retirees age 70½ and older are required to withdraw from their tax-deferred plans such as IRAs and 401(k) and 403(b) plans. RMD rules are serious business. The penalty for not withdrawing the proper amount is a 50% excise tax on the amount not distributed as required.

For example, if you don’t withdraw a required $1,000 from your traditional IRA or tax-deferred employer plan, the tax penalty is $500. For a taxpayer in the 25-percent income tax bracket, that’s twice what you would have paid in taxes if you’d followed the distribution rule.

If you don’t understand the tax law regarding calculating required minimum withdrawals, you might want to consult an accountant or other professional tax adviser. The only exception to the RMD beginning at age 70½ is for those who are still working for the company where they have a retirement savings account (e.g., 401(k) or 403(b) plan). They can delay their beginning withdrawal date until April 1 of the year following the year that they retire. This is called the “still working exception.” For all others, the first RMD can be taken as late as April 1 of the year following the year that someone turns 70½.

For example, if you turned 70 on November 1, 2016, and 70½ on May 1, 2017, you must take your first RMD no later than April 1, 2018. If you postpone your initial RMD until the following year, however, you will have to take two distributions during that first year. Therefore, for most people (unless you expect a big drop in income), it is preferable to take the first RMD at age 70½ so that the withdrawals are spread over two tax years rather than being bunched up into one.

How do you determine your RMD so you are sure to withdraw enough money to comply with IRS rules? Follow these five steps:

1. Determine the distribution year. The account balance used to compute the RMD is based on the balance in a person’s retirement account on December 31 of the previous year.

2. Calculate the account balance. Begin with the balances in all retirement accounts. An exception is Roth IRAs, where withdrawals are tax-free if an account has been open for at least five years.

3. Look up the life expectancy factor on which RMDs are based. A copy of the IRS Retirement Plan Uniform Distribution Table can be found at  http://njaes.rutgers.edu/money/ira-table.asp

4. Divide the account balance by the life expectancy factor. An example is that the life expectancy factor for a 70-year-old is 27.4. If a retiree has a $100,000 IRA balance the previous December 31, the RMD would be $3,649.64 ($100,000 divided by 27.4). A separate table is used for married couples with more than a 10-year age difference between spouses.

5. Take the RMD. Retirees must make their RMD withdrawal by the end of the distribution year. If they have multiple IRAs, they must aggregate the balances in each. The actual withdrawal can come from any one, or a combination, of their accounts as long as at least the required minimum amount is taken.

One final note: The answer to this question referred specifically to required minimum distributions. Retirees can always withdraw more than the RMD. After age 59½, retirement plan owners can withdraw as much money as they want from tax-deferred accounts without penalty. Taxes are due on the withdrawn amount, however, so advance planning?perhaps with a professional tax adviser?is in order.

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