RMD BasicsSubmitted by Mission Financial Planning on July 5th, 2016
Updated for the new SECURE Act: For any individual born after June 30, 1949, the required beginning date for Required Minimum Distributions (RMDs) is April 1 of the year after the year in which such individual reaches age 72 (or, in the case of certain plans, if he or she is still working, after the year in which he or she retires if later). Previously, the trigger age was 70½.
COVID-19 UPDATE: As of 3/28/2020, RMDs can be suspended for 2020 for those who prefer to leave that money invested.
Welcome to our series on RMDs – Required Minimum Distributions -- the distributions from retirement accounts (IRAs, 401ks, 403(b)s, 457 plans) that are required once the owner turns 72 years old.
If you have been making traditional IRA contributions you have received a tax break to encourage you to put money in an account to save for retirement. When you turn 72, you are required to start pulling money back out and to pay taxes on any of that money that hasn’t already been taxed.
The investment company that holds your IRA will likely make the RMD calculation for you but it’s good to know how it is figured, and a very good idea to double check their math.
In the year you turn 72 you’ll want to start calculating your RMDs.
Every RMD must be taken by December 31 each year to avoid a significant penalty.
To calculate the RMD amount, take the account’s most recent year-end value and divide that number by your life expectancy (according to an IRS table). When you are 72, with a few exceptions, the life expectancy divisor is 25.6, so the withdrawal ends up just under 4% of the account value. Each year you will find yourself dividing by a smaller (shorter life-expectancy) number, so the percentage of the required withdrawal increases.
Calculate the RMD amount on all of your retirement accounts – traditional IRAs (not Roths), SEP, Simple, 401(k), 403(b), and 457 plans. There are special rules that apply to 401k plans and several exceptions that apply to 403(b)s. We’ll cover these in a separate post about RMDs for Business Owners and Employees.
The posts in this series will help you understand RMDs better so you can use them to their full advantage while avoiding any pitfalls in the process.
Our blog will continue to be updated with articles about Required Minimum Distributions; all RMD related articles can be found at http://www.missionfinancialplanning.com/category/rmd-series
Other posts in the RMD series cover topics including:
- Real Life RMDs – how they work, practically, and how to take your distributions
- Special Situations – exceptions to the rules
- Making Charitable Donations with your RMD
- Roth IRAs and RMDs
- RMDs for Business Owners and Employees– there are some special rules for people who are still working
- Pitfalls of RMDs – some things to be extra careful of when you’re taking RMDs
- RMD Strategies