Do I have to take a Required Minimum Distribution?
A Required Minimum Distribution (RMD) is an IRS mandated cash distribution due after you reach a certain age. Contributions made while growing your retirement account are generally tax deductible and growth is tax-deferred, resulting in significant tax benefits. However, after you reach age 70 ½ you may be required to take a taxable distribution of a portion of your benefits.
If required distributions are not made, the IRS may apply a penalty tax of 50% of the amount which should have been distributed.
How is my Required Minimum Distribution Calculated?
The required minimum distribution is calculated by dividing the account balance at the end of the previous year by a minimum distribution factor. The minimum distribution factor is based on the theoretical life span taken from life expectancy tables provided by the Internal Revenue Service.
When do I have to start taking distributions?
Qualified Employer Sponsored Retirement Plan If you are a participant in an employer sponsored retirement plan, you may be allowed to delay your RMDs while you are still employed. A retirement plan participant must start taking RMDs in the year following the later of two events: the termination of employment with your employer or your attainment of age 70 ½. However, if you own at least 5% of the plan sponsor, you must start taking distributions at age 70 ½ regardless of your employment status.
Traditional IRAs You must begin taking RMDs by April 1st of the year following the year you reach age 70 ½.
Roth IRAs The Required Minimum Distribution rules do not apply to Roth IRAs taken during your lifetime. However, RMD rules apply to Roth accounts after the death of the owner of the account.
If you have more than one traditional IRA, your RMD will be calculated individually for each IRA. However, you may withdraw take the total RMD from any combination of the traditional IRA. You must take a separate RMD from each Qualified Employer Sponsored Retirement Plan for which you have an account. It is not permissible to combine your IRA and Retirement Plan accounts when determining and withdrawing RMDs.
Your RetirementPlans.com consultant can help you navigate these complicated IRS rules.