March 20, 2015 — If you have a 401(k) and/or an IRA, and you turned 70 and 1/2 last year, you have a very big deadline coming on April 1. That is the date by which you must have taken your first Required Minimum Distribution (RMD), or face significant penalties. A surprising number of people fail to take these distributions. You must also take your regular annual distribution by December 31 this year. All of the money taken from regular IRAs and 401(k)s is taxable as ordinary income, which is a significant consideration.
You must calculate your RMD on all of these retirement accounts, but you can withdraw it all from one account if you prefer. The advantage of Roth IRAs is that as the owner of the account you do not have to take RMDs.
The penalties for non-compliance are significant. According to the IRS, if an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.
How the RMD %s change over time
The required distribution percentage starts at 3.65% at age 70 and goes to 15.87% at age 100. Many advisors believe that this changing percentage makes a good way to take money out of your accounts and not run out of money in old age. This is because the formula starts low and gets higher over time, it offers built in safety over plans that take out steady amounts over time – as you age you have fewer years to worry about funding.
Comments? Have you had any problems calculating your required distributions, or other issues? Please share your thoughts in the Comments section below.
Text of IRS requirement:
“You must take your first required minimum distribution for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.”
There are some exceptions which allow some people who have not yet retired to delay their first RMD. See RMD FAQs at the IRS, or your tax professional.