Your Individual Retirement Account (IRA) or pre-tax qualified employer-sponsored retirement plan grows tax-deferred until you begin making withdrawals.
Since the retirement account is not meant to be a tax shelter, the Internal Revenue Service (IRS) requires you to begin taking withdrawals from your retirement account once you have attained the age of 72. This amount is called a Required Minimum Distribution (RMD).
When You Must Begin:
Your RMD is required to begin no later than April 1 of the calendar year following your 72nd birthday. This date is known as your required beginning date (RBD). All subsequent RMD payments are required to be taken by December 31, and a penalty tax of 50% is imposed on any portion of the RMD amount that is not withdrawn by its due date. Most individuals may opt to take their very first RMD by December 31 of the calendar year in which they turn 72. If you delay that first distribution until April 1 of the following year in which you have attained age 72, you’ll have to take two taxable distributions in the same year (the second one by December 31). Based on the amount you withdraw, you must pay ordinary income tax on all earnings and deductible contributions at your regular tax rate. If you made any nondeductible contributions to the IRA, you have a basis. These nondeductible contributions are not taxed when they are distributed to you but they are withdrawn on a pro-rata basis from the IRA. An important exception to note is that the RMD rules do not apply during the lifetime of the Roth IRA owner. Upon the death of the Roth IRA holder, the Traditional IRA RMD rules apply. The RMD is computed based on the single-life expectancy of the designated beneficiary of the IRA.
Calculating your Required Minimum Distribution:
To calculate your annual RMD amount, simply divide your previous year’s December 31 IRA balance by the applicable life expectancy factor that corresponds to your age, which can be found in the IRS Uniform Lifetime table below. Keep in mind that your RMD needs to be recalculated each year.
Although you only use your age to find your life expectancy factor, the Uniform Lifetime table provides the joint life expectancy factor of you and a beneficiary who is exactly ten years younger than you, even if there is no beneficiary named. The only exception to using the Uniform Lifetime Table is if an IRA owner has a spouse, who is the sole beneficiary and she/he is greater than ten years younger, then the Joint Life and Last Survivor table will be used. This will result in a lower RMD, which will allow more of your retirement assets to remain in the IRA growing tax-deferred.
If you have several different Traditional IRA accounts, although you are required to calculate the RMD amount separately for each IRA, you may aggregate those amounts together and take the total RMD from any one or more of your IRAs. If you maintain qualified retirement plans, such as a 401(k), Profit Sharing, Pension or 403(b), the RMD amount must be calculated separately for each account, and the RMD must be withdrawn from the respective retirement accounts. For those individuals, over age 72, who are still employed and participating in your employer-sponsored plan, you generally have until the later of April 1 of the year following the year you turn age 72, or the date in which you retire from the employer who maintains the plan to begin taking your RMD.
We Can Help:
Keep in mind that tax laws related to IRAs are complex, and each person’s situation is unique. The Wise Investor Group can help you calculate your annual RMD amounts as well as discuss the importance of naming an IRA beneficiary to ensure an appropriate distribution strategy that is in line with your overall estate and financial planning goals.