Most people will face RMDs in their lifetime; yet a random poll of some really smart people (people waiting at the dentist office) revealed that nobody knew what they were let alone how they might be effected. Not knowing could be costly!
Michelle Morris, CFP®, EA
BRIO Financial Planning
- What does RMD stand for?
RMD stands for “Required Minimum Distribution“.
Thanks to a Google search I now know it also stands for “Rippling Muscle Disease” which sounds awful and I hope none of my readers have it.
- What IS a Required Minimum Distribution?
It is the smallest (Minimum) amount of money that you MUST (Required) take out (Distribution) from your IRA or 401k/403b plan once you reach a certain age.
- What age do I have to start Required Minimum Distributions?
You must begin taking RMDs from your IRAs and 401k/403b and other employer retirement plans the year you reach 70.5 years old. (Technically you have until April 1st of the year AFTER you turn 70.5).
If you are 70.5 and still working and you are not a 5% or greater owner of the business sponsoring the retirement plan, then you do not have to take RMDs until you retire. This only applies to your current workplace retirement plan.
- How do I calculate my RMD?
The RMD is determined by an IRS table. For most people this is the Uniform Lifetime Table.**
**Note if you are married, and your spouse is more than 10 years younger than youand he/she is the only beneficiary of your IRA, you use a different table.
Let’s look at an example. Suppose you are 75 years old (use your age as of 12/31 of the current year). Suppose your IRA balance on 12/31 of the prior year was $300,000. Looking at the table we see the divisor for a 75 year old is 22.9.
We take $300,000 divided by 22.9 and get $13,100.44 This is your RMD this year for this IRA.
- Why do I have to take Required Minimum Distributions?
Most of the time, you fund these plans throughout your working years with “pre-tax” dollars. In other words, you did not pay tax on those dollars when you contributed them. This is a great way to decrease your tax bill, especially during your peak working years when your tax bracket is likely higher than it will be later in retirement.
These pre-tax dollars are invested and grow, hopefully for decades, with no taxes due on any of the earnings. It is a tax shelter.
But what the tax man (or woman) giveth, the tax man eventually taketh away. Uncle Sam (and many state governments) has been waiting patiently to take his share of those original contributed dollars and all the subsequent dollars that have accumulated in the account.
They will be taxed in the year of distribution.
It is possible that you have some “post-tax” dollars in these accounts, it is important to be aware of this so those previously taxed dollars are not taxed again.
- What happens if I don’t take a Required Minimum Distribution?
The penalty is steep: if you do not take a RMD, you owe a penalty of 50% of the amount not taken. Ouch! You can request a waiver to the penalty if you establish that the shortfall was “due to reasonable error and that reasonable steps are being taken to remedy the shortfall”.
- Can I take more than the Required Minimum Distribution?
Absolutely, the government will be happy to get the additional tax. J But if you take out too much money and spend it, you run the risk of running out of retirement funds.
- Do I have to take Required Minimum Distributions from my Roth IRA? No, currently, your Roth IRAs are not subject to Required Minimum Distributions.
- What happens if I inherit an IRA from someone else?
The rules for Inherited IRAs are ENTIRELY different than for your own. The amount and timing of RMDs is different depending on a few factors including your relationship to the deceased.
- Where can I learn more about RMDs?