UNDERSTANDING REQUIRED MINIMUM DISTRIBUTIONS
Have you ever noticed when you ask someone the age of their baby or toddler you get answers like “he’s 18 months old” or “she’s two and a half.” If you’re turning 40 this year and someone asks you your age, you’re not likely to say, “I’m 39 years and seven months.” You are more likely to say “I’ve got the big Four-O coming up this year.” At what age do we stop using months and half years? I don’t know if anyone has ever done a study on that, but at some point we just use years, except when it comes to talking about retirement. Source: NLG
If you have been saving for retirement in a qualified retirement plan, such as a 401(k), 403(b) or IRA, there is one age where you do have to be conscious of that half year: 70½. Are you familiar with the term “required minimum distributions?” The Internal Revenue Service code states that in the year you turn age 70½ you must start taking required minimum distributions (RMD) from your qualified assets. If you turned 70 on February 1, 2016, do you have to take your first required minimum distribution from your qualified accounts in 2016? The answer would be yes because you would be age 70½ on August 1, 2016. What if you turned 70 on August 1, 2016? You would not be age 70½ until February 1, 2017 so your first required minimum distribution would be in 2017.
WHEN DO YOU NEED TO START TAKING YOUR FIRST MINIMUM DISTRIBUTION?
According to the IRS, the required beginning date for taking your first minimum distribution is April 1 of the calendar year following the calendar year in which you attain age 70½. So if you attain age 70½ at any time in 2016 you have until April 1 of 2017 to take your first required minimum distribution. You might think that’s a good thing. But proceed with caution. If you wait until April 1 of 2017, you will be required to take two minimum distributions in 2017. The first distribution taken by April 1 will be based on the plan balance of your account as of December 31, 2015. Your second RMD taken in 2017 will be based on the balance of your account as of December 31, 2016. If you wish to avoid taking two RMD withdrawals in 2017, you can take your first RMD by December 31, 2016.
HOW TO CALCULATE YOUR REQUIRED MINIMUM DISTRIBUTION
The most common way to calculate the RMD is by using the IRS Uniform Lifetime Table. The amount of the required distribution is calculated without respect to your beneficiary’s age, or even if you have a named beneficiary. There is one exception to using the Uniform Lifetime Table. If your sole beneficiary is your spouse, and your spouse is at least 10 years younger, the Joint Life and Last Survivor Table can be used to calculate your RMDs. The Joint and Survivor life expectancy table will produce a longer payout period and therefore a lower RMD than the Uniform Lifetime Table.
When using either table, there is an applicable divisor associated with each age listed. So your account balance is divided by the divisor associated with your current age to calculate your RMD amount. That is the minimum amount you must take as a distribution from your qualified account. You can always take more but you have to take at least the required minimum. You will have to pay regular income tax on the amount distributed to you but the after tax balance is now considered non-qualified and you can do anything you want with that money.
IF YOU HAVE MONEY IN MORE THAN ONE IRA ACCOUNT, YOUR RMD MUST BE CALCULATED ON EACH ACCOUNT.
However, once the amount has been calculated on each IRA account, you do not have to take an RMD from each of those accounts. You are allowed to aggregate the entire required amount and take the distribution from only one of the IRA accounts. The same is true for a 403(b) contract owner who has separate 403(b) accounts. The RMD is calculated on each account but the total amount due can come from only one of the 403(b) accounts. However, retirement plans such as 401(k) and 457(b) require the RMD to be taken from each account, even if there are multiple accounts.
The RMD rules apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE-IRAs. The rules also apply to employer sponsored retirement plans such as profit sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans as well as Roth 401(k) accounts. But the RMD rules do not apply to Roth IRA accounts while the owner is living.
WHAT IF YOU DON’T WANT, OR NEED, THE MONEY?
Unfortunately, that does not allow you to disregard the RMD requirements. The penalty for failure to take RMDs is steep. If the amount distributed is less than the RMD, an excise tax equal to 50 percent of the shortfall can be levied against you. So if you should have taken $1,000 you will now have to take $1,500.
WHAT IF YOU DO HAVE QUALIFIED MONEY IN A RETIREMENT PLAN WITH YOUR EMPLOYER, AND YOU ARE STILL ACTIVELY AT WORK?
In that situation, perhaps you can avoid taking RMDs at age 70½. If you are less than a 5 percent owner of the business, you do not have to begin taking your RMDs until the year you retire from the business. But if you are a 5% or more owner of the business, you will have to begin taking your RMDs by age 70½, even if you are still actively participating in the qualified plan sponsored by your business.
Also, a qualified plan is permitted to provide that the required beginning date for all employees, owners and rank and file, is April 1 of the calendar year following the calendar year in which the employee attains age 70½ regardless of whether the employee is a 5 percent owner. So if you are still working at age 70½ and participate in a qualified plan of your employer, you must check with your employer to see if you do need to start taking RMDs from your employer’s qualified plan.
If you have saved money on a pre-tax basis for retirement, you need to be aware of the required minimum distributions rules. If you have planned well for retirement, perhaps you don’t need that money. But the IRS has allowed you to save that money on a tax deferred basis for, perhaps, many years. So if you are turning age 70½ in 2016, you are free to lie about that fact to the world at large, but you do have to start taking your RMDs from your qualified retirement accounts.
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