By Jean D. Koehler
Age 70-1/2 represents an important milestone for your retirement savings. Once you reach this age, you will need to begin withdrawing money from your retirement accounts. The Internal Revenue Service (IRS) requires you to take these mandatory annual withdrawals, which are formally known as Required Minimum Distributions (RMDs).
RMDs apply to assets held in individual retirement accounts (IRAs), SEP IRAs, Simple IRAs and workplace retirement plans like 401(k), 403(b) and 457(b) plans. The RMD rules do not apply to Roth IRA owners, but may apply to owners who inherited someone else’s retirement savings.
The rules governing RMDs are complex, and the steps required to take distributions may appear overwhelming. Here are some answers to common questions that may clear up the process:
Q: When am I required to take annual minimum distributions from these accounts?
A: Required distributions must begin by April 1 of the year after you reach age 70-1/2. If you turn 70-1/2 at any point in 2017, you have until April 1, 2018 to take your first required distribution. If you continue to work and have a workplace plan, you may be able to delay taking RMDs from that account until after you retire.
Q: How often must I take withdrawals?
A: You must take your RMD amount by December 31 of each year. If you wait until the year after you turn age 70-1/2 to take your first distribution, the second is still due by the end of that calendar year. In other words, a person turning 70-1/2 in 2017 will need to take distributions for both 2017 (by April 1, 2018) and 2018 (by December 31, 2018).
Q: How much is my RMD amount each year?
A: The IRS provides tables that help you calculate the distribution amount for a given year based on your age and life expectancy1. RMDs need to be recalculated each year. The RMD for any year is based on the value of an account as of the last day of the previous year. That value is divided by the distribution period defined in the applicable IRS table. You are always free to withdraw more than the calculated RMD amount at any time. However, if you withdraw more than your required RMD in 2017, you still need to pay the full RMD in 2018.
Q: If I have multiple retirement accounts subject to RMD rules, can I take all of the distributions from one account?
A: RMDs must be calculated for each account separately. However, if you own multiple IRA or 403(b) plans, you can add up the RMD amount from each plan of the same type and take a single withdrawal from one of those accounts. For example, you could satisfy your IRA RMD requirements by taking a single withdrawal from your SEP account, but not from your 403(b). Rules are different, however, for 401(k) and 457(b) plans. With these accounts, RMDs must be calculated and distributed from each account separately.
Q: How are distributions taxed?
A: Generally, withdrawals of pre-tax contributions and earnings are taxed as ordinary income. Although, failing to take distributions on a timely basis subjects you to a tax penalty equal to 50 percent of the amount not withdrawn to meet the minimum distribution requirement. (There is also a penalty if you withdraw less than your required RMD.)
RMDs are an important part of your retirement income strategy. If you have questions or would like more information about how to take or prepare for taking your annual withdrawals, consult a trusted financial advisor and tax advisor. Visit the IRS guide to “Required Minimum Distributions” for more information.
About Jean D. Koehler:
Jean D. Koehler,CLTC,CRPC is a Financial Advisor with Ameriprise Financial Services, Inc. in Arcadia, CA. She specializes in fee-based financial planning and asset management strategies and has been in practice for 17 years. To contact her, visit ameripriseadvisors.com/jean.d.koehler or call her at (626) 254-0455.
Neither Ameriprise Financial nor its affiliates or representatives may provide tax or legal advice. Consult your tax advisor or attorney regarding specific tax issues. Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.