The term Required Minimum Distribution (RMD) relates to the money you saved during your working years in an IRA, 401(k), or other tax deferred retirement plan. Federal law requires that when an individual reaches the age of 70 ½ years, he or she must begin withdrawing money from retirement accounts.  The government claims it wants you to have the use of your retirement funds during your lifetime, but its real goal is to make you convert your tax deferred funds to taxable income. During your working years, the law allowed you to put a portion of your income into a tax deferred retirement account every year. 

The money you placed in your retirement account was not considered taxable income.  Now, it’s time to pay Uncle Sam his share, Federal tax law requires people who are 70 ½ and older to annually withdraw a percentage of the money from their retirement plans and pay the taxes on those withdrawals.  In other words, every year after you reach the magic age of 70 ½, you must convert a portion of your retirement fund to taxable income.

The rule is that you must take your first RMD by April 1 of the year following the year you turn 70 ½.  Following your first RMD year, you must take your withdrawal or distribution by December 31 of each succeeding year.  For example:  If you turned 70 before July 1, 2016, you would have reached the magic number of 70 ½ by the end of the year.   In that event, you were required to take your first RMD by April 1, 2017. If your 70th birthday fell in the second half of 2016, you will hit the magic number sometime before June 30, 2017.  That means you are not required to take your first RMD until April 1, 2018.    However, waiting until early 2018 may not be a good idea. Why?   Because if you wait, you will end up taking 2 RMDs in a single year, and that could cost you at tax time. 

Let’s look at an example.  If you turn 70 ½, this May and wait until April 1, 2018 to take your required RMD, you will be forced to take two distributions in 2018 – one by April 1, and the second by December 31.  That could put you in a higher tax bracket and result in a bigger tax bill. 

The following are the types of retirement accounts subject to RMDs:
•    Rollover IRAs
•    Inherited IRAs
•    SEP IRAs
•    SIMPLE IRAs
•    401(k), 403(b) and 457(b)s
•    Keogh Plans

There are no required minimum distributions for Roth IRAs unless you inherited the account, but RMDs are required for Roth 401(k)s.

Calculating a RMD

You don’t need to be a math whiz or accountant to figure out the amount required for your RMD.  Look online for IRS Publication 590-B. It contains the basic information you will need.  Generally, most people turning 70 ½ this year will need to add up the balance of their RMD eligible accounts and then divide the total by the IRS figure of 27.4.  That figure is based on age and life expectancy.  To be safe you need to find a RMD worksheet and figure out exactly what percentage applies to you.  Many of the investment houses have free online RMD calculators to help you find the correct RMD for you.

IRAs and rollover IRAs are the easiest to figure out.  You find the ending balance for 2016 in each of your retirement accounts, add them up and divide by the percentage that applies to you.  You can choose to take the entire RMD from a single IRA and leave the others intact.  So long as your withdrawal is big enough to cover all of your IRAs, you have met your obligation.  Taking RMDs from 401(k) and 403(b) accounts is a bit more complicated.  The law requires you to take a separate RMD from each employer sponsored retirement plan you have.  You will calculate the RMD for each workplace retirement plan you own, using the same life expectancy factor.  You cannot add them together and take all the money from one account.  Unlike IRAs, Federal law requires you to take a separate RMD from each of your workplace retirement accounts. Another caveat with workplace 401(k)s and 403(b)s:  if you are still working at 70 ½ and you do not own 5% or more of the company, you can delay your first RMD from your workplace account until the year you stop working and retire. 

Normally, investment firms will automatically withhold 10% from your distribution and send it to the IRS as taxes, but 10% is not a mandatory figure.  You have the right to tell your IRA sponsor to refrain from withholding any taxes, that you will deal with the taxes later.  You also have the right to ask the sponsor to withhold more than 10% of the payout.    If you are taking your RMD in monthly or quarterly payouts, you may need to file a form W-4P with the sponsor to either block withholding or determine the amount you want withheld.  You may also need to check your state tax laws to determine state withholding requirements.

Exceptions to RMD Requirements

If you are married and your spouse is more than 10 years your junior, and if that spouse is your sole beneficiary, your RMD will be smaller than the standard.  It will be smaller because you will use the IRS “joint life expectancy” calculation method that accounts for your spouse’s longer life expectancy. If all your retirement savings are in a Roth IRA, you are exempt from withdrawal rules.  Earnings on Roth IRAs are tax free and may remain in the account for as long as you like.  As mentioned earlier, while Roth IRAs are exempt, Roth 401(k)s are not.

Penalties and Other Rules Governing Distributions

The penalty for failing to take a RMD is 50% of the amount you failed to withdraw.  Remember, RMD stands for Required Minimum Distribution.  When Uncle Sam says “required,” he doesn’t mean “maybe.” The stiff penalty tells you that the IRS is determined to collect those deferred taxes. That means if your 2016 RMD was $3000 and you failed to take it, the penalty will be $1500.  That’s harsh!  If you missed your April 1, RMD deadline, contact the IRS immediately.  The agency will often waive the penalty for taxpayers with a good excuse.  Illness, poor advice from your tax preparer, and other good reasons may help your case.  If you miss your deadline, withdraw the required sum as soon as possible to show your good faith; then, figure the penalty on IRS form 5329.  Attach the form to a statement explaining why you missed the deadline and send it to the IRS.  Do not send a check.  If the IRS decides to waive your penalty, it will let you know.  Otherwise, you will receive a tax bill.

You always have the option to take out more money than the RMD.  Those retirement funds belong to you, and you can spend them any way you want – so long as you pay the taxes.  However, you cannot apply any additional money you withdraw to your next year’s RMD.  If your 2017 RMD is $2000 and you choose to withdraw $3000, you cannot apply the extra $1000 to your 2018 RMD.  Also, keep in mind, just because the law requires you to take a distribution from your retirement account, that doesn’t mean you are required to spend it.  You can take the money and invest it or put it in another account.  However, you cannot take the RMD and use it to open another IRA or deposit it in another retirement account.  Any part of a RMD rolled over into an IRA is considered an excess contribution, subject to penalties.  That is a big no! no! and can get you in trouble.

Congress has made a permanent rule that allows taxpayers over the age of 70 ½ to donate up to $100,000 from their IRAs directly to charity.  The gift can count as your RMD.  If you itemize your taxes, you can also take your RMD, donate the cash to charity and claim a tax deduction for your donation.  If you want to go the charitable donation route, check with your accountant or tax preparer to figure out the best method for you.

If you have questions about your RMD obligations, talk to your IRA sponsor.  The company handling your funds should have the answers you need and the forms to help you calculate your RMD.  Don’t hesitate to contact them for information.  Also, Congress may make tax reform changes this year, so keep your eye out for news of changes in the law.

Eisenberg, Richard. “ABCs of RMDs: Required Minimum Distribution Rules for Retirement.”www.forbes.com/sites/nextavenue/2016/02/04/abcs-of-rmds-required-minimum-distribution-rules-for-retirement/#7ede35056db7. Accessed 11 Apr. 2017.

McCormally, Kevin. “10 Things Boomers Must Know About RMDs From IRAs.” Kiplinger, 2017, www.kiplinger.com/slideshow/retirement/T045-S001-8-things-boomers-must-know-about-rmds-from-iras/index.html. Accessed 11 Apr. 2017.

“IRA Required Minimum Distribution Worksheet.” Department of Treasury https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets. Accessed 11 Apr. 2017.

“Publication 590-B.” Department of Treasury, 12 Apr. 2017, www.irs.gov/pub/irs-pdf/p590b.pdf. Accessed 11 Apr. 2017.