What are required minimum distributions during retirement and how much are they?

The rules that surround our retirement plan accounts and IRA’s can be tricky, especially when it comes to determining an individual’s required minimum distributions, or RMDs.

RMDs are the minimum amounts that a retirement plan account owner must withdraw as required by the federal government. Generally, a person is required to take RMDs from an IRA or retirement plan account in the year when he or she reaches age 70 ½ or later. If the retirement plan is an IRA or the account owner is a five percent owner of the business sponsoring the retirement plan, the RMDs must start once the account holder is age 70 ½ regardless of whether he or she is retired.

The rules for minimum distributions can be confusing, but a person’s RMD for any year is the account balance as of the end of the preceding calendar year divided by a distribution period from the IRS “Uniform Lifetime Table.” This is the way most people will calculate their RMD. However, if a spouse is the sole beneficiary of an IRA, and is more than 10 years younger, the Joint Life and Last Survivor Expectancy table must be used. A person is also allowed to take penalty-free distributions from their IRA or retirement account plans at age 59 ½.

One reason we urge clients with retirement account plans to prepare for RMDs is the large tax penalty the owner must pay if he or she makes an error. If the account owner fails to withdraw the RMD, fails to withdraw the full amount of the RMD, or fails to take a RMD prior to December 31, the owner is taxed 50 percent of the amount not withdrawn.

Different rules apply to the beneficiary of a retirement plan account or IRA when the owner of these accounts dies before RMDs have begun. Usually, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either:

  1. Within 5 years of the owner’s death, or
  2. Over the life of the beneficiary starting no later than one year following the owner’s death.

RMD rules do not apply to the original Roth IRA owner, but the rules do apply to beneficiaries who inherit an IRA. A spouse is allowed to move the assets to his or her own Roth IRA instead of taking an inherited Roth IRA to avoid RMDs. Roth accounts in 401(k) and 403(b) plans are subject to RMD requirements.

Another rule to remember is that if a person has multiple retirement plans, the RMDs must be calculated separately for each plan. There is an exception for some IRAs. If a person has more than one IRA, whether a traditional, SEP, or simple IRA, he or she can add the RMDs and take the combined distribution amount from any one or more of the IRAs.

RMDs also are used to calculate your income and can be used to disqualify you from certain benefits.  Some individuals can benefit from taking larger distributions at lower tax rates and you should consider this and discuss it with your CPA, financial planner, and estate planning lawyer.

The IRS offers a worksheet that can be used to calculate someone’s RMD, located here http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Required-Minimum-Distributions-%28RMDs%29   Calculating RMDs can an a tricky process to figure out even with guides like this. We recommend you start developing a financial strategy for these required minimum distributions now to ensure your estate is in order and all beneficiary designations are taken care of. Contact the Law Office of David Goldman PLLC today at 904-685-1200 to plan for your RMDs.

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