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Required Minimum Distributions can be confusing and complicated. However, developing a strategy can streamline your RMDs and give you clarity about when, which retirement account, and how much you need to withdrawal from a retirement account(s). Here are the 5 important must knows right now that I have experienced with clients:
1. What are Required Minimum Distributions?
Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.
Retirement plan participants and IRA owners, including owners of SEP IRAs and SIMPLE IRAs, are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.
When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death. See Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), for complete details on when beneficiaries must start receiving RMDs.
2. What happens if a person does not take a RMD by the required deadline?
If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.
3. What types of retirement plans require minimum distributions?
The RMD rules apply to all employer sponsored retirement plans, includingprofit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.
4. When must I receive my required minimum distribution from my IRA?
You must take your first required minimum distribution for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.
A different deadline may apply to RMDs from pre-1987 contributions to a 403(b) plan (see FAQ 5 below).
5. Can an account owner withdraw more than the RMD?
Contact Todd Sepp to review your retirement accounts to develop a strategy for your Required Minimum distributions. He can help you calculate your RMD amounts and together help design a strategic plan for your RMDs.