Every year thousands of taxpayers are hit with a heavy 50% penalty for not withdrawing enough money from their retirement plan(s). Here is what you need to know to ensure this does not happen to you or someone you know.
Who is subject to Required Minimum Distribution (RMD) rules?
- Anyone who participates in a qualified retirement plan like IRAs (traditional, SEP, SARSEP, and SIMPLE), Roth 401(k), 401(k), 403(b), 457(b) and profit sharing plans AND
- is 70 ½ years or older,*
- who is generally retired OR
- who is the beneficiary of a plan
- Exception: Owners of qualified Roth IRA accounts
The confusion of multiple tables
To determine the amount that must be withdrawn each year you need to go to the correct life expectancy table published by the IRS in Publication 590. There are three tables:
- Joint & Last Survivor.
When to use: Your spouse is the sole beneficiary AND your spouse is more than 10 years younger than you.
- Uniform Lifetime Table.
When to use: Your spouse IS NOT more than 10 years younger than you OR your spouse is not your sole beneficiary
- Single Life Expectancy.
When to use: You are a beneficiary of another account
How much do I need to take out and when?
Once you find the correct table, determine your life expectancy and divide the result by the balance in your account as of December 31st of the previous year.
- The amount must be withdrawn by December 31st of the year. Exception: in your initial RMD year you have until April 1st of the following year to withdraw the funds.
- Thankfully, many retirement account administrators will make the RMD calculation for you. But it is still your responsibility to ensure the calculation is correct.
- The deadlines are strict so don’t miss them. The 50% penalty can be applied each year, so the impact can be dramatic over time. On the other hand, if you are penalized and have a defensible reason you did not take the RMD, you should try to get the penalty reduced or eliminated.
- Remember to conduct the calculation each year. Not only do life expectancy numbers change as you age, so does the balance in your retirement savings accounts.
Some Tips to Help Never Forget
Want to make sure this doesn’t happen to you? Here are some tips.
- Calculate the RMD for each account in early January each year. Set up automatic periodic withdrawals from the account to accommodate the RMD.
- Make a review of your accounts part of your tax planning each year.
- Ask for help. At first, finding the correct life expectancy table and determining the correct calculation can be overwhelming. Have someone review your calculations until you feel comfortable with the process.
- Connect your RMD to a key event like your birthday or anniversary. Then give yourself the additional gift of a payday out of your retirement account.
* Can be later if you are still actively working. If, however, you are a 5% or greater owner of the business sponsoring the retirement plan you must take an RMD when 70 ½ whether retired or not.