During retirement, whenever you take money out of a qualified account such as a traditional IRA, a SIMPLE IRA, or a SEP IRA, that money qualifies for some kind of tax treatment. These accounts were built using money before the taxes were paid. This benefit allows you to realize better growth, but eventually these taxes have to be paid.
The amount of income you are required to withdraw from your IRA is called your Required Minimum Distribution or RMD. The rules for your RMD require that you take out a minimum amount from your IRAs each year once you reach a certain age.
THE RULES FOR TRADITIONAL IRAS
For IRA and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs (but NOT Roth IRAs), the two months you want to remember are APRIL and DECEMBER.
- The first year you turn 70½, you get a little breathing room before you absolutely must withdraw your money. You turn 70½ six months after your 70th birthday, and then you have until APRIL 1 of the following calendar year (the year after you reach age 70½) to take your RMD.
For example, if your 70th birthday is June 30, 2016, then you will reach age 70½ on December 30, 2016. Your first RMD for the year 2016 must be withdrawn by APRIL 1, 2017.
What if you have a later birthday and you don’t reach age 70½ until January of 2017? Then you don’t have to worry about taking out an RMD for the year 2017. You can chose to wait, in which case your first RMD would be due on April 1, 2018. However, you might want to take a withdrawal during 2017. Here’s why:
- The second year and all subsequent RMD withdrawals made from your IRA once you hit that magic birthday of 70½ must be withdrawn by DECEMBER 31.
For example, if you reach the age of 70½ in August of 2015, then you have until April 1 of 2016 to take your first RMD for the year 2015. BUT your RMD for 2016 is still due on December 31, 2016. In order to avoid having to pay the income taxes for both distributions during the same tax year of 2016, you can chose to take your first RMD before April of 2016.
Q AND A FOR IRAs
Do I have to take money out of my IRA even if I’m still working? Yes, once you reach that magic birthday of 70½, your RMD is due even if you are not yet retired and still working. This rule is different for some defined-contribution plans such as 401(k)s.
Can I take out more than the required minimum amount? Yes. Any amount you take out will be considered as part of your taxable income for the year, except for any part that was taxed before (such as your basis or a starting amount that you put into your IRA after-tax) or any amount that can be received tax-free (such as an amount from a Roth IRA.)
Can I take out money before 70½? Yes. As part of your distribution plan, the IRS says that you can start withdrawing money from your IRA without penalty once you reach the age of 59½
What is the penalty for NOT taking out my RMD? You may have to pay a 50 percent excise tax on the amount you failed to withdraw as part of the taxes owed. This penalty is also charged if you fail to take out enough money.
Do these rules apply to my 401(k) plan? Yes, minimum distribution rules apply to all defined contribution plans and profit sharing plans, but the rules are slightly different. GO HERE to learn more.
What if you don’t need the money? You might be able to transfer all or part of your IRA into a Qualified Longevity Annuity Contract or QLAC. This gives you the ability to accumulate mortality credits and secured a fixed income alternative for later in life, after the age of 85. Your financial professional can help you determine whether or not this would be a good option for your situation.
To find out how to plan for your RMD and tax obligations during retirement, please contact us and one of our financial experts will get back to you.