RMD – What is a Required Minimum Distribution?

What is an RMD and how does it affect me?   Generally, the IRS requires you to make a distribution from IRA and tax deferred retirement accounts each year, once you turn 70½. These withdrawals are called Required Minimum Distributions (RMDs).

An RMD from a traditional IRAs is required after you turn 70½, even if you are still working.  These distributions are required and you can be met with a penalty of 50% of the amount of the required minimum distribution that was not distributed.

You are not required to take RMDs from a Roth IRA during your lifetime.  Should you die and the new owner (beneficiary) of this Roth IRA account is your surviving spouse, they too, would not be required to make a distribution from this account during their lifetime.    When the beneficiary is not the spouse, the account is subject to the rules of Required Minimum Distributions.

You may be asking yourself what other accounts you might have that have Required Minimum Distributions attached to them.  You must also begin taking annual RMDs from SEP and SIMPLE IRAs, pension and profit-sharing plans and 401(k), 403(b) and 457 retirement plans annually past age 70½. If you are still employed, you may be able to delay taking RMDs from a profit-sharing plan, a pension plan, or a 401(k), 403(b) or 457 plan until you retire. The exception: you must take RMDs from these types of accounts after you turn 70½ if you own 5% or more of a business sponsoring such a retirement plan.

Except for your first annual RMD, the deadline for making this distribution is December 31, annually.   For your first RMD distribution, the IRS gives you 15 months instead of 12 to make this distribution.  Thus, your first RMD can be taken in the calendar year in which you turn 70½ or you can take your initial RMD any time before April 1 of the following year.  However, if you put off your first RMD until the next year, you will still need to take your second RMD by December 31, of that year, making for two RMD distributions in the same year.

RMDs are taxable, which is more than likely why the distributions are required.  Remember, this money is coming out of a tax deferred account and at some point, the IRS wants to be paid the taxes due on these funds.   Thus, the withdrawn amounts are characterized as taxable income under the Internal Revenue Code.   The account owner is taxed at his or her income tax rate on the amount of the withdrawn RMD.  However, to the extent the RMD is a return of basis or is a qualified distribution from a Roth IRA, it is tax free.

More than likely, you have more than one account subject to the rules of required minimum distributions.  Calculating RMDs can be complicated.   An IRA owner (traditional, SEP or SIMPLE) must separately calculate the RMD for each IRA owned.  However, the total amount due can then be withdrawn from a single IRA account or the withdrawal can be split in any manner between two or more IRAs.

At Tobias Financial Advisors, for our Wealth Management Clients and their qualified accounts held under our “umbrella”, we calculate and distribute your Required Minimum Distributions for you.   If Tobias Financial Advisors is not managing your assets, it is important to have all of your retirement accounts reviewed by a professional to make sure you fulfill your RMD obligation. If you skip an RMD or withdraw less than what you should have, you may be hit with a harsh penalty.

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