Required Minimum Distributions are mandated by the IRS from all qualified retirement accounts. These include monies that you let remain in your employer-sponsored plan or values in traditional IRAs.
The reason that the IRS requires a distribution of this type is to ensure that a retirement plan serves the purpose for which it was intended: to provide retirement income to the individual, and not simply accumulate money in a tax-deferred account indefinitely.
This required distribution age is 70½, and a minimum distribution may be taken in the year in which you reach this age.
However, you are not required to withdraw the minimum amount until the year after you attain 70½, but if you elect that approach, you would have to take two RMDs in that year.
As an example, if I reach 70½ on June 1st of 2014, I may withdraw my RMD in 2014, or I can wait until 2015 and withdraw two amounts in that year, but I am required to take the 2014 amount by no later than April 1, 2015.
The 2015 RMD must subsequently be withdrawn by Dec. 31, 2015.
Each succeeding year's RMD must continue to be withdrawn by Dec. 31 of each year.
The amount of each year's RMD is calculated by dividing the total prior year-end IRA value by a life expectancy factor from the IRS Uniform Lifetime Table.
This table is used by all single recipients or by married couples in which the spouse is no more than 10 years younger than the recipient. IRS Publication 590 contains all of these factors.
As an example, if on Dec. 31, 2013, your IRA contained $400,000, and if you were 71 (and your spouse were not 60 or younger) in 2014, the calculation of your RMD in 2014 would equal $400,000 divided by 26.5 (from the IRS table), giving you a required minimum distribution amount in 2010 of $15,094.34.
Similarly, in 2015 you would divide your EOY 2014 IRA account value by 25.6 to calculate the amount of RMD in 2015.
In some years, it may make sense to take out more money than simply your required RMD.
For example, if you are in an unusually low income tax bracket this year, you may wish to withdraw “extra” monies over and above the RMD amount.
Don't forget, your first choice in that situation would be to find out if you qualify for a Roth IRA conversion.
Check with your tax adviser to see if you should convert to a Roth IRA.
Quoting from an IRS publication: “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 percent.
“The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.
“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 that are 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.”
Another thing to remember about RMDs is that it is usually a good idea to take them as late in the year as possible to maximize the deferral of income taxes.
In considering which assets to take out of your IRA, it often best to choose those that you consider most likely to have capital gain-type appreciation in the future.
For example, if you have a stock in your IRA that you think is temporarily under priced, you may want to take it out and pay tax based on the low current value.
When the stock rebounds, you will enjoy capital gains treatment on the hoped-for price turnaround.
If you follow this suggestion, be sure to keep accurate records of the stock value on the date you took it out of your IRA, as that value will be your basis in the stock going forward.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Got a financial planning question for Greg? You may email him at firstname.lastname@example.org.
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