Required Minimum Distribution from Retirement Accounts

November 2, 2016

As the saying goes, there are two certainties in life – Death and Taxes. There is another certainty when we reach age 70 ½ and that is the required minimum distribution (RMD) from your traditional IRA account. You should be aware that you must begin taking required minimum distributions from your traditional IRAs (but not your Roth IRAs) no later than April 1 following the year in which you reach age 70½. The tax rules require minimum annual distributions to be made to help assure that IRAs are used primarily to provide for retirement, rather than as a family tax shelter. You could be hit with a 50% penalty tax if you don’t withdraw the required minimum amounts each year.

Your first required distribution year is the year you turn age 70½, even though the distribution can be made as late as April 1 of the following year. For each year thereafter, the required minimum distribution must be made by December 31. If you wait until April 1 to take your first required distribution, you will have to take two distributions in the same year. This could negatively impact your taxes. If so, you may want to take your first distribution by December 31 of the year you turn 70½.

Lifetime required minimum distributions are calculated by dividing the IRA balance as of December 31 of the preceding calendar year by the applicable life expectancy factor. Complications may arise if you have multiple IRAs. For example, the minimum distribution is calculated separately for each IRA, but the total minimum distribution for all of them may be paid out from one IRA or from a combination of IRAs.

IRA trustees are required to report the required distribution amount to IRA owners, or to calculate it for the owners on request, by January 31 of the year the distribution is required. However, since the required minimum distribution can be withdrawn from whichever IRA you chose, you are responsible for ensuring the proper amount is requested and timely received.

Annual distributions are also required to be made from your employer’s qualified plan and cannot be satisfied by taking the RMD from an IRA account. The plan administrator is responsible for calculating and timely paying the RMD amount from qualified retirement plans, however you are responsible for notifying them and for taking the withdrawal each year. Exceptions to the RMD rule in your employer's retirement plan may apply if you are still working. Contact your plan administrator for the details.

If you have any questions regarding RMD amounts from your retirement accounts and the tax implications they may have, please contact our office and we can set-up an appointment to discuss.

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