The year-end deadline for taking RMDs from your retirement planning accounts is getting closer. Do you know whether or not you’ve taken your RMD this year? Are you confused about what, exactly, an RMD is, and why they’re necessary? Let’s go over what you need to know about RMDs.
What Are RMDs?
Required minimum distributions, or RMDs, are a “distribution” that are required by the IRS when you have funds in a retirement savings account. These minimum distributions are calculated based on the total amount of funds in your various retirement savings. For example, if you have multiple IRAs or qualified plans through your employer, RMDs are calculated for each of those accounts. However, it’s also important to remember that you don’t have to take your RMD from each individual account based on how much is in them. You can take the full RMD for one account – which can help you to plan your continued savings during retirement and taxes in an efficient way.
To do this, you take the sum of each account type (for example, if you have multiple IRAs, you can take the sum of all your IRAs), and take the RMD from one of those accounts. So, if you have three IRAs, you can take the total RMDs from all of your IRAs from one of them. The same rule applies to 401(k)s or 403(b)s. However, you can’t take an RMD from one account type from another (so taking all of your RMDs from a 401(k) even though you are including IRAs or 403(b)s into your calculation wouldn’t work) because each account type has different tax codes.
What Age Do RMDs Take Effect?
When you turn 70½, the government requires that you start taking RMDs that will be taxed as ordinary income. However, you’re not required to take your first RMD the minute you turn 70½ – you have a little bit of lead time to decide what account you’d like to take your first RMD from, or when taking it (and paying taxes on that income) makes the most sense for you and your unique financial situation.
When Do You Take RMDs?
You have about a year after you turn 70½ to start taking your RMDs. You can either:
- Take your first RMD by the end of the year that you turn 70½
- Take your first RMD by April 1st of the following year
After that, each annual RMD needs to be taken by December 31st moving forward.
What Accounts Have RMDs?
Most retirement savings accounts require minimum distributions. Specifically, the following accounts require minimum distributions be taken each year after you turn 70½:
- SEP or SIMPLE IRAs
- Traditional IRAs
- Some plan participants (i.e. pension plan contributors, etc.)
If you have questions about whether or not your retirement savings account requires a minimum distribution each year – ask us! We’d be happy to help answer any questions you might have as you near retirement.
How Much Do RMDs Have To Be?
RMDs are calculated for each account by dividing the prior balance (as of December 31st of the previous year) by the life expectancy factor published by the IRS in Publication 590-B. There are different tables you can used based on your life situation, including:
- Joint and Last Survivor Table (if your spouse is the sole beneficiary of your account and is more than 10 years younger than you)
- Uniform Lifetime Table (if your spouse isn’t your sole beneficiary or your spouse is less than 10 years younger than you)
- Single Life Expectancy Table (if you’re a beneficiary of a retirement account)
How Are RMDs Taxed?
RMDs are generally taxed as ordinary income, and you should keep this in mind when you’re planning your distributions. For example, if you choose to delay your first RMD to the year after you turn 70½ (before April 1st), and you still owe that year’s RMD by December 31st, you will have the funds from both of those RMDs taxed as income in one year. This could potentially raise your income tax bracket, or force you to pay more taxes than you’d like to next filing season.
Are There Penalties If You Don’t Take RMDs?
There are significant penalties if you fail to take your RMDs on time. In fact, people who fail to take their first RMD within the year-long timeframe they’re allotted, or for others who may forget to take a subsequent RMD by the end of the year, the IRS charges a fee of 50% of the total amount you should have taken in your last RMD.
In addition to that, the funds in your RMD are still taxed at an ordinary income rate. So, essentially, you wind up paying both income tax on your RMD and a 50% penalty fee. If you’re like many people, your RMDs are no small amount – meaning the taxes and fee you’ll pay are taking a notable chunk out of the retirement income you had been anticipating in a given year. This penalty can be waived if the account owner can prove that their mistake was due to reasonable error, or they’re actively working to correct the error. To apply for relief, use Form 5329.
Making sure you take your RMDs on time is critical! If you’re a Jacobi Capital Management client, we can help you organize your RMDs, and any other retirement income requirements you may run into. Have questions or want to learn more? Contact us today!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.