Tips For Investors: Required Minimum Distribution Checklist
Financial savvy is important when it comes to distributions from retirement accounts. Make a mistake and it could cost you dearly in taxes and penalties. Retirement rules are a bit of an art form! Since it is March and 4-leaf clovers are everywhere, I want you to be “in the green” when making distribution choices from retirement accounts. Following is a brief discussion about RMD’s and some questions to ponder. Naturally, if you have questions, give me a call to discuss them.
Required minimum distributions are withdrawals from tax-deferred accounts that are mandated by the IRS once an investor has reached 70 ½ years of age. This ensures that these accounts are not held indefinitely and are distributed, thereby being used for their intended purpose of providing retirement income. Failure to withdraw the RMD carries a penalty of 50% of the RMD amount that was not taken. Review this checklist with your financial advisor to help determine the amount of your RMD for the year.
- Have you attained age 70 ½?
Distributions must generally begin in the year you turn 70 ½. The first annual payment may be delayed until April 1 of the year following the year in which you turn age 70 ½; subsequent payments must be taken by December 31 every year. This means that if you turned 70 ½ in the prior year and took your first distribution in April of the current year, your second distribution will have to be made by December of the current year.
- Are you the beneficiary of an IRA owner?
If you are a beneficiary of a tax-qualified savings account, annuity, or IRA, you may be subject to RMD regardless of your age. Consult your financial advisor as there are different rules depending upon your relationship to the IRA owner and whether the IRA owner died before or after attaining age 70 ½.
- Do you own tax-qualified savings accounts or IRAs?
Tax-qualified savings accounts include certain retirement plans offered through your employer, such as 401(k), 403(b), 457(b), or Roth 401(k) plans. Also included for purposes of RMD are traditional IRAs or annuities that were paid for with pre-tax dollars. Roth IRAs or annuities paid for with after-tax dollars are not subject to RMD during your lifetime.
- Do you own more than one tax-qualified account?
An IRA owner must calculate the RMD separately for each IRA that he or she owns, 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. However, RMDs required 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.
- Are you retired?
If you are not retired, you may not have to take RMD from your employer-sponsored plan after turning age 70 ½ unless your employer specifies otherwise. However, you are still subject to RMD from annuities and IRAs. Consult your financial advisor for details.
- Have you calculated your RMD amount for each of your accounts?
Divide the prior year’s ending account balance (including additional benefits) by your life expectancy factor, as described below, for each of your retirement accounts, IRAs, and annuities.
- Have you calculated the balance of each tax-deferred account as of December 31 of the prior year?
If any of these accounts include additional benefits (such as living benefits, withdrawal benefits, death benefits), the present value of these benefits must be included in your account balance when calculating your RMD amount. See your bank and/or financial institution for these values.
- Have you determined your IRS life expectancy factor?
Use the tables in IRS Publication 590 to calculate your life expectancy factor for your IRAs. The table you use will depend upon your marital status, the difference in age between you and your spouse (if your spouse is your beneficiary), and whether you are the owner or beneficiary.
Use the Uniform Lifetime Table if you are the owner of the IRA and:
- You are not married,
- If your spouse is your beneficiary and is not more than 10 years younger than you, or
- If your spouse is not your beneficiary.
Use the Joint and Last Survivor Table if you are the owner of the IRA and:
- Your spouse is your beneficiary and
- Your spouse is more than 10 years younger than you.
Use the Single Life Expectancy Table if you are the beneficiary of an IRA. If there is more than one beneficiary, and none of the beneficiaries is the spouse of the owner, use the age of the oldest beneficiary.
The Uniform Lifetime table is also used by employer retirement plans to determine the distribution amounts to participants.