RMD
Required Minimum Distributions
IRS regulations require that you begin taking “Required Minimum Distributions (RMD)” in the year that you turn 70 ½ from any tax-sheltered retirement plans that you established for yourself or through your employer. Then you must take a distribution every year thereafter. You can withdraw as much as you like each year, but you must make the RMD.
As a retired tax professional, I could write a book, a very big book, about all of the rules, regulations and exceptions relating to RMD’s, but others already have. My goal here is to make you aware of this requirement if your tax-sheltered savings vendor hasn’t already.
I am sure that some of you are in the same situation as I am. During my working years, I engaged in voluntary tax sheltered savings through my employer and also on my own using IRA’s. I have not needed to use this money so far. Next year, 2017, I turn 70 on May 29th. I will be 70 ½ on November 29th. Some of you may have turned 70 ½ this year.
Using my own situation as an example, I have tax sheltered savings plans as follows:
- a SIMPLE IRA which I established to shelter self-employment income, invested in stocks in a brokerage account
- a Roth IRA invested in stocks in a brokerage account
- a regular IRA that was a rollover from a 403(b) savings plan with my employer, invested in stocks and mutual funds in a brokerage account
- I also inherited a Roth IRA and a regular IRA from my mother who died in 2001. There are special distribution rules for inherited plans.
Who must take an RMD?
The RMD rules apply to all employer sponsored retirement savings plans, including
profit-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) and Roth 403(b) accounts started with your employer, but you are not required to take distributions from Roth IRA’s that you started on your own. As a matter of fact these make excellent bequests to your heirs
How much must you withdraw each year?
First you must determine your life expectancy from one of three IRS life expectancy tables. Most of us will use Table III which can be found by doing an internet search for “IRS life expectancy tables”, but they can also be found in Appendix B of IRS Publication 590-B
Table I Single Life Expectancy Is for a person who inherits an IRA. This person could be single or married. I see this as a misnomer because a single person might feel they should use this table. Single people should use Table III for tax sheltered accounts they started for themselves.
Table II Joint Life and Last Survivor Expectancy is used when the spouse is the sole beneficiary and is more than 10 years younger than the owner.
Table III (Uniform Lifetime). Most IRA and employer sponsored plan owners will use this table (single people and married couples where the beneficiary spouse is less than 10 years younger than the owner).
Two step calculation procedure:
Step 1 - Once you have determined the correct table, read the number within the table (your life expectancy) that applies to your age at your birthday in the year of the withdrawal.
Step 2 - You take this number and divide it into the balance in the tax-sheltered account at the end of the prior year.
Example using me: I am married and my spouse is 8 years younger than I, so I use Table III. When I look in the table for a 70-year-old, I see the number 27.4 (my life expectancy). I take this number and divide it into the balance in the tax-sheltered account at the end of the prior year. In my case that would be the balance on December 31, 2016. If the balance in my IRA was $500,000 on that date, then I would have to withdraw $18,248 (500,000/27.4) in 2017.
Let me continue my example for one more year. Let’s say that the stock market had a good year and the balance has grown to $518,000 on December 31, 2017. I look again in Table III, but now my age is 71, so my divisor is 26.5. In 2018, I must withdraw $19,547 (518,000/26.5).
Here is the nice thing about the above process – it is the same process for all types of accounts that require RMD’s except for some inherited retirement plans. If the balance in my SIMPLE IRA was $200,000 on December 31, 2016, then I would have to withdraw $7,299 (200,000/27.4) in 2017.
When must you make the withdrawals?
By the end of each year. You can take your RMD on the first day of the year, in monthly installments, or on the last day of the year, any way you like. There is an exception for the first year – the year you turn 70 ½. In my own case since I turn 70 ½ on November 29th, I could wait and take the distribution as late as April 1, 2018 (i.e., April 1 of the year after you turn 70 ½). However I would have to take the RMD for 2018 by December 31, 2018. In other words, I would have two distributions in 2018 which could put me into a higher tax bracket.
What happens if you don’t make the withdrawals?
You will have to pay a 50% penalty on the RMD not taken, and when you do take the distribution, it will also be taxed. Given the size of the penalty, it would never pay to delay a distribution.
Do you have to make withdrawals if you still work?
It depends upon the plan. Check with your advisor.
Can you still contribute if you are working?
It depends upon the plan. Check with your advisor.
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The link below takes you to an IRS web site that can answer many of your questions. You can also go to the User Forum on our class webpage to discuss these issues.