If you\u2019ve reached a certain age, you may have recently received a letter from your bank, brokerage firm or mutual fund company, informing you that you\u2019ll have to take an RMD before year end \u2013 and they may have even told you what the amount is.<\/p>\n
So what is an RMD? Well, let\u2019s start by remembering that all the money you contributed to your 401k plan at work, or to your SEP IRA or regular IRA, was done with pre-tax dollars \u2013 that is, income that you put into the account before you paid any tax on it to the IRS.<\/p>\n
The investment earnings on those salary deferrals or IRA contributions \u2013 interest, dividends and capital gains \u2013 were also never taxed \u2013 they just continued to accumulate in your account over the years.<\/p>\n
But\u2026 the 401k, SEP IRA and IRA are not tax-free<\/em> retirement accounts, they are tax-deferred<\/em> accounts.<\/p>\n So after letting those contributions \u2013 and the income they earned \u2013 grow without tax \u2013 often for 40 years or more, the IRS wants to start collecting the taxes that it deferred. But they\u2019ve graciously allowed you to wait until you reach age 70 \u00bd, or if later, the year in which you retire, before doing so.<\/p>\n There is an exception to the age 70 \u00bd rule \u2013 and that\u2019s if you\u2019re either a 5% or greater owner of the business that sponsors the retirement plan, or if the RMD is for an IRA, then your withdrawals must start the year you turn 70 \u00bd even if you\u2019re still working.<\/p>\n So, we know what the RMD is \u2013 it\u2019s a minimum amount that the IRS requires you to withdraw from your retirement account generally starting at age 70 \u00bd, so that they can tax it.<\/p>\n How is your withdrawal or distribution taxed?<\/strong> How is your distribution amount calculated?<\/strong> There are three different tables, and the one to use depends on your personal situation.<\/p>\n The Joint and Last Survivor Table is used if the only beneficiary of your account is your spouse, and your spouse is more than 10 years younger than you;<\/p>\n The Uniform Lifetime Table is used if your spouse is not the only beneficiary, or if your spouse is not more than 10 years younger than you; and<\/p>\n The Single Life Expectancy Table is used by a beneficiary of an account.<\/p>\n Here\u2019s a simple example, for an unmarried person who\u2019s 72 this year. The balance in their IRA account at the end of last year was $400,000. Their birth date is March 1st, 1940. So we\u2019ll divide 400,000 by the divisor that we look up in the IRS\u2019s Uniform Life Table, which for a 72 year old is 25.6. The result is $15,625 and that is the minimum that must be withdrawn before December 31st.<\/p>\n So, what\u2019s the deadline for taking your distribution?<\/strong> A couple of examples may help.<\/p>\n Let\u2019s say your birthday is May 15th, and this year you turned 70. Well, then you turn 70 \u00bd on this November 15th, and you have to take your distribution before December 31st of this year.<\/p>\n Now, let\u2019s say your birthday is October 15th, and this year you turned 70. Well, then you turn 70 \u00bd on April 15th next year, and you have to take your distribution before December 31st next year.<\/p>\n And one last kink \u2013 you can actually delay your first RMD until April 1st of the year following the year you turn 70 \u00bd. But then you would have to take two distributions in one year, and that generally doesn\u2019t make sense.<\/p>\n What if you have more than one retirement account subject to RMDs?<\/strong> The same holds true for 403(b) account owners.<\/p>\n But RMDs required from other types of retirement plans, like 401k and 457b plans, have to be taken separately from each of those accounts.<\/p>\n Can I take out more than my required minimum distribution?<\/strong> What if I don\u2019t withdraw enough?<\/strong> So it\u2019s important to keep on top of your RMD calculations and the timeliness of the distributions.<\/p>\n What if I inherited an IRA or retirement plan account?<\/strong> So in summary, RMDs are really nothing more than the IRS collecting the taxes on income and earnings that it allowed you to defer, and basing the collection schedule on your life expectancy.<\/p>\n","protected":false},"excerpt":{"rendered":" If you\u2019ve reached a certain age, you may have recently received a letter from your bank, brokerage firm or mutual fund company, informing you that you\u2019ll have to take an RMD before year end \u2013 and they may have even told you what the amount is. So what is an RMD? Well, let\u2019s start by […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","_mi_skip_tracking":false,"footnotes":""},"categories":[3,5,7,9,11],"tags":[13,66,88,107,117,132],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/1972"}],"collection":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/comments?post=1972"}],"version-history":[{"count":0,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/1972\/revisions"}],"wp:attachment":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media?parent=1972"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/categories?post=1972"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/tags?post=1972"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nWell, remember that the salary contributions were made with income that was never taxed, and the earnings on those contributions were also not taxed when they were earned. So it makes sense that the IRS would tax the withdrawal as income, at ordinary income rates. When you request your RMD from your bank or brokerage firm, they\u2019ll send you a form 1099-R, which you\u2019ll use to report that distribution as income on that year\u2019s tax return.<\/p>\n
\nIt\u2019s pretty simple, really. We divide the prior year\u2019s balance of the retirement plan or IRA account by a divisor \u2013 called a life expectancy factor \u2013 that we look up in tables on the IRS website or in IRS Publication 590.<\/p>\n
\nYou\u2019re required to take your first RMD in the year you turn age 70 \u00bd. Figuring when this is, isn\u2019t as difficult as it sounds \u2013 if your birthdate is January through June, then your distribution has to be taken in the year you turn 70 \u2013 no later than December 31st. If your birthday is in July through December, then you can take your distribution in the year you turn 71, no later than December 31st.<\/p>\n
\nThe IRS requires you to calculate the RMD separately for each IRA that you own. But you can withdraw the total amount from any one or more of the IRAs \u2013 your choice.<\/p>\n
\nOf course! The IRS has been waiting for years \u2013 often decades \u2013 for the opportunity to tax your deferrals or contributions into those accounts, and the income on them, and so they would love you to take the money out faster. Bigger withdrawals mean more tax revenue for them.<\/p>\n
\nNot a good thing! If you don\u2019t take your RMD, don\u2019t withdraw the full required amount, or don\u2019t withdraw the RMD amount by the applicable deadline, the amount you should have withdrawn but didn\u2019t is taxed at 50%. This is on top of the regular income tax that will be due when you do take the distribution.<\/p>\n
\nRMDs for inherited IRAs and retirement plans are treated differently than those taken by the original account owner. We\u2019ll cover the differences in a separate video, so stay tuned.<\/p>\n