The Ins and Outs of Required Minimum Distributions

Published on April 1, 2013

Required Minimum Distributions (RMDs) are a necessary evil after turning 70 ½ for all IRA owners. However, this article should help break down the facts and options you have when it’s time for you to take one. It’s not as confusing or complex as you may think. Just don’t get caught avoiding your RMD; you can face a 50% penalty for not complying!

The Basics:

In the year you turn 70 ½ is when it is time to take your first RMD. Every subsequent year following, you will be required to take a distribution from your IRA for as long as you live, or until your IRA funds are depleted.  In order to figure out what your RMD is for the year, you total the balances from all Traditional, SEP and/or SIMPLE IRAs as of December 31^st and divide by a life expectancy divisor provided by the IRS (to view the Life Expectancy Divisor Chart, click here). Although you can figure out your RMD annually, your IRA custodian or trustee is supposed to notify you every January if an RMD needs to be taken for that year and for how much. The reason the RMD is calculated annually is because your IRA balances and age will change on an annual basis! Why pay last year’s RMD amount if it no longer applies?

What Happens if I Turn 70 ½ this year?

Well, you have two options since this is your first RMD. First, you can take your RMD before year’s end (December 31^st) in the year you turn 70 ½. This will allow you to take your first RMD in a separate calendar year from your second one. You second option is to take your first and second RMDs in the same calendar year. You have until April 1^st to take your first RMD and until December 31^st to take your second in the year after you turn 70 ½. One disadvantage to choosing option two would be that you would cause yourself a double-dip of extra taxable RMD income. However, if you work with your financial planner or tax advisor, you will be able to develop a strategy best suited for you.

What Happens if I Turned 70 ½ in a prior year?

If you’ve made it past year one for your RMD, then you’re in the clear…just remember to take your distribution before the end of the calendar year (December 31^st).

What if I have multiple IRAs?

As stated before, your RMD is determined by the balance of all traditional, SEP, and SIMPLE IRA accounts. Although the RMD is pulled from information from all accounts, there is no stipulation as to what account you must withdrawal funds from. You may take your RMD from one IRA, or spread it out over all three.

For more information on Required Minimum Distributions, please visit the IRS website or read this article by Bizactions.com titled, “Don’t Forget to Take IRA Required Minimum Distributions.”