Blog Article

How Required Minimum Distributions Work!


By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®
Published On 11/15/2017

When you reach age 70½, or you inherit a retirement account you plan on stretching the life of, you’re legally required to take an annual withdrawal called a required minimum distribution (RMD) from your retirement account. Failure to take your RMD results in a 50% penalty on the RMD. Below is a list of frequently asked questions regarding required minimum distributions.

When do I have to take my first RMD?

You must take your first required minimum distribution by April 1 of the year after you turn 70½. For example, if you turn 70½ on December 15, 2017, you need to take your first RMD by April 1, 2018. Keep in mind that if you wait until 2018 to take your first RMD in this example, you would have to take two RMDs that year. Since two RMDs in one year could push you up into a higher tax bracket, it’s advisable to take your first RMD by December 31 of the year you turn 70½.

What accounts do I have to take an RMD from?

RMDs apply to pre-tax retirement accounts such as Traditional IRA, Rollover IRA, SEP IRA, Simple IRA, 403(b), 457, and 401(k)s. RMDs do not apply to Roth IRAs.

Current law does require RMDs be taken from Roth 401(k)s, but you can easily avoid this by rolling that account into a Roth IRA.

How do I calculate an RMD?

You calculate your RMD based on a Uniform Lifetime Table the IRS provides, which in layman’s terms is a remaining life expectancy table. In the example below, the individual has a $1,000,000 Traditional IRA account balance as of December 31 of the prior year. Since this individual is taking their first RMD after reaching age 70½, the $1,000,000 year-end balance must be divided by a factor of 27.4, as the Uniform Lifetime table below shows next to age 70. The divisor of 27.4 or 3.65% represents the amount that must be withdrawn for the first RMD, totaling $36,496.35.

While the Uniform Lifetime Table is the most commonly used table, you can use a different one if you have a spouse who is more than 10 years younger than you and is the sole beneficiary of the retirement account. The difference between this table and the Uniform Lifetime Table is that your RMD is lower to compensate for the age difference.

What if I have multiple retirement accounts subject to RMDs?

To calculate your RMD in this case, you can aggregate the RMDs from all your IRAs and withdraw the entire amount from one IRA, or proportionally from each retirement account. You just need to make sure that you withdraw the entire amount to avoid the 50% penalty. One caveat is that if you still have a 401(k) with a former employer, you can’t aggregate its RMD with your other IRAs. You must take the specified RMD out of the 401(k).

The exercise of aggregating RMDs across multiple custodians can be a challenging and time-consuming process, and may only get more cumbersome as you get older. We suggest considering the consolidation of any external retirement accounts to simplify this process and unify your investment strategy. You can find more information about the benefits and process to consolidate former retirement accounts here.

When should I take the RMD?

Some households prefer a monthly check (RMD divided by 12 months) to even out the distribution throughout the year, while others take it at the beginning or end of the year. The decision is yours, but keep in mind that the RMD amount is set in stone from the prior year-end value of the retirement account, and you must take it by December 31 to avoid the penalty.

How much should I withhold for taxes?

When you take your RMD, you’ll be asked what federal and state withholding amount would you like to take. We suggest you consult with your tax professional on this topic.

How can I use the money?

The money from your RMD can be used for several things, including:

  • Household expenses in retirement
  • Family vacations
  • Gifts to family members
  • Reinvesting in a taxable account to continue growing the assets if you don’t need them right now
  • Gifts to charity through making a qualified charitable distribution

We recommend that you discuss this topic with your advisor to determine the best way to take your required minimum distribution. You can find more information about retirement plan and IRA RMDs on the IRS website.

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By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®

Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.

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