8 Things Baby Boomers Need to Know About RMDs
Required Minimum Distributions, often referred to as RMDs, are amounts that the U.S. federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans. They are a fact of life for most retirees. Here are eight things every baby boomer needs to know about them.
1. RMDs generally must begin at age 70½. Owners of most types of retirement accounts, including traditional IRAs and 401(k) accounts, generally must withdraw at least a minimum amount every year beginning at age 70½. That minimum amount is known as a required minimum distribution, or RMD for short. Your employer’s non-IRA retirement plans may allow you to delay that start of RMDs past age 70½ if you are still working.
2. RMDs are designed to stretch out distributions – and the resulting tax payments – over your lifetime. They are calculated by dividing your prior December 31st account balance by a distribution period published by the IRS. To give you an example, let’s say your prior December 31st balance is $1,000,000 and you are age 71. According to the IRS’s Uniform Lifetime Table, the distribution period for someone age 71 is 26.5 years. So $1,000,000 is divided by 26.5 to arrive at a $37,736 RMB for the year. (If your spouse is more than 10 years younger than you and your sole beneficiary, you use a different IRS table.) Generally, your IRA custodian or retirement plan administrator will calculate your RMD for you.
3. RMDs are generally not required from Roth IRAs. Although RMDs are required from all employer-sponsored retirement plans, including and Roth accounts in those plans, they are not required from Roth IRAs until after the account owner’s death. To avoid having to take RMDs from your Roth 401(k), 403(b), or 457(b) account, you can transfer those savings to a Roth IRA after you leave your job.
4. Your RMB may not be 100% taxable. RMDs from traditional, tax-deferred accounts are taxed as ordinary income. However, if you mad any non-deductible or after-tax contributions to your account, that part of your distribution is tax-free. RMDs from Roth accounts are tax-free.
5. Charitable distributions from your IRA are tax-free and count toward your RMD. Instead of withdrawing money from your IRA to satisfy your RMD obligations, you can have up to $100,000 per year distributed directly to a qualified charity. You cannot claim a charitable deduction for the distribution, but it is tax-free and counts toward your RMD for the year.
6. You can withdraw more than the RMD amount. The RMD is simply the minimum amount that must be withdrawn that year.
7. The penalty for not taking an RMD is huge. You may have to pay a 50% excise tax on any amount not distributed as required. The IRS may waive the penalty if you can prove to them that the shortfall was the result of a reasonable error and that you have taken steps to correct it.
8. You get a few extra months to take your first RMD. Typically, the RMD deadline is December 31st. However, individuals taking their first RMD may take it as late as April 1st of the year following the one in which they turn age 70½. This move will result in you having to take two RMDs in one year and may increase the tax you’ll owe if the combined amount of the distributions bumps you up to a higher tax bracket.
With offices in Williston and Rutland Vermont, Copper Leaf Financials’ team of experienced financial planners work with clients to assure that all of the vital components of your financial plan are in order – including a detailed plan for dealing with RMDs and the associated tax implications. For more information call 802.878.2731.