Taking Required Minimum Distributions
While the tax code allows you to save tax-deferred money in retirement plans such as individual retirement accounts (IRAs), 401(k) plans, and other retirement plans, the Internal Revenue Service wants its cut sometime. That’s why holders of most retirement accounts must start withdrawing money at age 70½. The amount that you are required to withdraw is called a required minimum distribution (RMD). Generally speaking, the RMD applies to all retirement funds except those in Roth IRAs and employer plans like a 401(k) plan for those still working at age 70½. Once you retire after age 70½, you must begin taking your RMD from that plan as well. If you fail to withdraw your RMD, the IRS will impose an excess accumulation penalty, which equals 50% of the RMD you failed to withdraw. To avoid this penalty, follow these steps:
Determine whether you’re required to take an RMD.For your retirement accounts, you must take your first RMD by April 1 of the year after you turn 70½. If you wait until April 1 of the year after you turn 70½ (rather than taking your first RMD that same year), you’ll have to take another RMD by December 31 of that same year. After that, you’ll be required to take your RMDs by December 31 of each following year. For example, if you turn 70½ in 2018, you must take your first RMD by April 1, 2019. You must then take your second RMD by December 31, 2019. If you’ve inherited a retirement plan, you’re generally required to take an RMD the year after the plan holder’s death, unless the plan owner turned 70½ before death. In that case, you’re required to take the RMD the same year as the owner’s death. Spouse beneficiaries may be able to delay required distributions.
Identify all your retirement accounts. List all your retirement accounts, including employer plans, traditional IRAs, SEPs, and SIMPLE accounts. This list will help ensure you calculate your RMD correctly and that you’ve considered all accounts.
Calculate your RMD. To calculate your RMD, your total account balance as of the preceding year is divided by your life expectancy. The IRS publishes life expectancy tables for this purpose.
Create a withdrawal plan. You don’t have to take an RMD from every one of your accounts, as long as your total withdrawals equal the total amount calculated. You can group your retirement accounts by account type and take a single distribution from one account in each group. However, you can’t cross over between IRAs, 401(k)s, and 403(b)s, for instance. You’ll also have to decide whether you want to take your withdrawals monthly, quarterly, or annually.
Perform a year-end checkup.Toward the end of each year, make sure you’ve identified all your accounts, calculated your RMDs accurately, and distributions have been taken. You only have until December 31 to make any necessary adjustments to avoid the 50% excess accumulation penalty.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.