1. What is the RMD?
An RMD or Required Minimum Distribution is the amount that the IRS requires you to withdraw from your qualified retirement plan each year once you reach age 70 ½. There are certain provisions and restrictions you need to know about the RMD, so we’ll cover it in this article. The big picture idea is that the IRS wants you to start taking money from your retirement accounts so they can begin collecting tax revenue on it. Planning ahead and understanding your options will allow you to maximize your tax benefits with respect to the RMD.
2. When do I start taking my RMD?
Most people will start to take their RMD in the year they turn 70 ½. The IRS will allow account holders to take their first RMD up to April 1st of the year following the year they turn 70 ½. Put simply, if you turn 70 ½ in 2012, you will have until April 1st of 2013 to take your RMD. This is a special provision only for first time RMD recipients. The deadline for taking your RMD in any given tax year is December 31st.
3. Who needs to take an RMD?
Retirement account holders who reach age 70 ½ are required to start taking an RMD. According to the IRS, RMD rules apply to “all employer sponsored retirement plans, including: profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans….traditional IRAs and IRA-based plans such as SEP IRAs, SARSEPs, and SIMPLE IRAs.” Roth IRAs are not subject to RMD rules.
If you are still employed and reach age 70 ½, you might be able to delay the required minimum distribution. Check with your employer plan to see if you qualify to delay the RMD. If you have an IRA, there is no way to delay your RMD.
4. How much will my RMD be?
Generally, your retirement account custodian will provide your RMD figure at the beginning of each year. This is because the RMD amount is calculated based on your December 31 balance. If you’re already drawing funds from your retirement account, you might actually satisfy the RMD with your regular distributions. If your RMD is larger than your projected distributions for the year, you will need to make sure you withdraw enough to cover the RMD. If you do not withdraw enough to cover your RMD, you will be taxed at 50% on the amount not withdrawn – so make sure you take your RMD.
Your RMD is calculated based on IRS life expectancy tables. You can find out what your RMD will be by taking your December 31 balance and dividing it by the life expectancy factor found in the IRS life expectancy table. Make sure you’re using the appropriate table – there are three of them:
Joint and Last Survivor Table – Used by account holders who have named their spouse as sole beneficiary, and is more than 10 years younger than the account holder.
Uniform Life Table - Used by account owners whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger
Single Life Expectancy Table – Used by the beneficiary of an account.
Each of these three tables can be found in IRS publication 590. You can also calculate your RMD with the following RMD calculators:
5. How to take your RMD from multiple retirement accounts.
It’s common for retirees to have multiple retirement accounts including multiple IRAs, 401(k)s, and even profit sharing plans. The IRS requires an RMD to be calculated based on each account’s balance. Once the RMD is determined for each separate plan, it must also be withdrawn from that plan.
For example, let’s say you have an IRA and a 401k. Your RMD for the IRA is $4,000 and your RMD for the 401(k) is $6,000. You must withdraw the RMD from each account; you are not allowed to combine the RMD and take $10,000 from the 401(k).
You are, however, able to satisfy the RMD through ‘like’ plans. In other words, if you have two IRAs and each RMD has been calculated at $4,000, you are allowed to take $8,000 from one IRA and satisfy the total RMD for both IRAs. This is because the account type (IRA) is the same. This rule also applies if you have multiple 401(k) accounts.
6. You cannot roll your RMD into another retirement account.
Once your RMD is distributed, you cannot put it into another tax sheltered retirement account. If you are still working, you may be able to contribute income into your employer’s retirement plan; but you cannot directly transfer or place an RMD into a retirement plan.
7. You cannot take extra distributions and apply it for next year’s RMD.
If you happen to take out more than the required minimum distribution, you will simply treat it as taxable income. You cannot apply extra distributions towards the following year’s RMD.
8. Your RMD can be given to charity.
You may have heard about a qualified charitable distribution (QCD). In previous years, the IRS allowed account owners to exclude qualified charitable distributions of up to $100,000 when it’s was paid directly from your IRA into a qualified charity. The QCD expired at the end of 2011, so a direct charitable distribution is no longer allowed. You can, however, still itemize charitable contributions to qualified charities, so you might consider giving away some or all of your RMD. It will still be considered taxable income, but you can lower your overall taxable income by itemizing it and lowering your taxable income by the same amount of your charitable donation.
Do you have any other questions about the RMD?