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As we make our first steps into 2017 with invigorated hope and renewed promises of success, wellbeing and happiness, we would like to share with you our new year’s resolution of exceedingly becoming a trusted source of information and inspiration for all our clients and friends.
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Whether 2017 is the year of your retirement or not just yet, you will find it quite helpful to know how the required minimum distributions (RMDs) from retirement plans work.
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- Since you participate (or are going to) in a retirement plan, you may already be familiar with the notion of required minimum distributions, but just to be on the safe side, here is the accepted definition.
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Required Minimum Distributions are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 1/2 years of age.
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Obviously, retirement funds cannot be kept in your account indefinitely, after all, the government has to make sure it gets tax revenue from tax-sheltered retirement accounts. Nevertheless, please note that even though your required minimum distribution is the minimum amount you must withdraw from your account each year, you can always withdraw more than the minimum required amount, but you can’t use the excess to meet the RMD requirements in future years.
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| Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts). |
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| The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. They also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive. |
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The beginning dates for your first RMD are as follows:
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- for IRAs (including SEP and SIMPLE IRAs) April 1 of the year following the calendar year in which you reach age 70 1/2.
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- for 401(k), profit-sharing, 403(b), or other defined contribution plan, generally, April 1 following the later of the calendar year in which you reach age 70 1/2, or retire.
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All IRA owners (other than Roth IRA owners) must begin taking RMDs when they turn age 70 ½. This applies to traditional IRAs, as well as to employer-sponsored IRAs, like SEP and SIMPLE IRAs. Whether you are still working makes no difference.
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| If you’re age 70 1/2 or older and still working, you may be able to delay taking RMDs from the plan sponsored by the company for which you’re still working. This is commonly known as the still working exception. For this exception to apply you must: |
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- Be considered employed throughout the entire year,
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- Own no more than 5% of the company, and
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- Participate in a plan that allows you to delay RMDs.
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| Alternatively, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70 1/2, even if you have not retired. |
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If you own 5% or more of the business sponsoring the plan, then you must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70 1/2.
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| The first year following the year you reach age 70 1/2 you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70 1/2). To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70 1/2 instead of waiting until April 1 of the following year. |
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| For each subsequent year after your required beginning date, you must withdraw your RMD by December 31. A different deadline may apply to RMDs from pre-1987 contributions to a 403(b) plan. |
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| Retirement plan participants and IRA owners, including owners of SEP IRAs and SIMPLE IRAs, are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs. |
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| If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year in which the full amount of the RMD was not taken. |
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| Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD. |
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| If you do miss the RMD deadline and have a reasonable excuse (your tax preparer gave you bad advice or you were seriously ill, for instance), don’t send the IRS a check. Fill out the Form 5329 for RMD penalties and mail a waiver request letter with it, explaining what happened. |
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Generally, a RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes and updates regularly in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Choose the life expectancy table to use based on your situation.
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You should use:
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- Joint and Last Survivor Table if the sole beneficiary of the account is your spouse and your spouse is more than 10 years younger than you;
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- Uniform Lifetime Table if your spouse is not your sole beneficiary or your spouse is not more than 10 years younger;
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- Single Life Expectancy Table if you are a beneficiary of an account (an inherited IRA).
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| If you own several IRAs you must calculate the RMD separately for each IRA that you own, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts. |
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| However, RMDs from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts. |
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You can find all these rules in a RMD Comparison Chart (IRAs vs. Defined Contribution Plans) on the IRS website.
As it is often the case with rules and regulations, IRS guidance regarding RMDs may be at times confusing, complicated and unclear. It is one more reason for you to plan ahead with your financial advisor or tax professional so as to prevent any penalties and additional taxes. The beginning of the year is as good a time as ever to follow our advice. |
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