Did You Turn 70 and 1/2 Last Year? Big Deadline Looms April 1

Category: Financial and taxes in retirement

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.

50% Penalty
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fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.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.

Posted by Admin on March 20th, 2015

4 Comments »

  1. If you didn’t turn 70 1/2 last year, but will soon you may want to consider the implications of delaying the first distribution since that will give you two distributions in the same year and may cause a heftier tax bill. I will be facing that decisions in the near future and will make sure to discuss that one with a pro. see http://www.cpapracticeadvisor.com/news/12056173/many-retirees-face-april-1-deadline-for-distributions

    a nice calculator http://www.bankrate.com/calculators/retirement/ira-minimum-distribution-calculator-tool.aspx

    by elaine — March 21, 2015

  2. Thanks for the article, especially the percentages, and Elaine’s comment. I turn 70 in August this year (2015), so I have the choice of one RMD in 2015, and one in 2016, or two in 2016. Now, I have to match the two possible AGI’s with the federal tax brackets. FYI on brackets below, or google “Tax Brackets”.
    2014 Tax Brackets (for taxes due April 15, 2015)
    Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
    10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950
    15% $9,076 to $36,900 $18,151 to $73,800 $9,076 to $36,900 $12,951 to $49,400
    25% $36,901 to $89,350 $73,801 to $148,850 $36,901 to $74,425 $49,401 to $127,550
    28% $89,351 to $186,350 $148,851 to $226,850 $74,426 to $113,425 $127,551 to $206,600
    33% $186,351 to $405,100 $226,851 to $405,100 $113,426 to $202,550 $206,601 to $405,100
    35% $405,101 to $406,750 $405,101 to $457,600 $202,551 to $228,800 $405,101 to $432,200
    39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more

    by OldNassau — March 25, 2015

  3. I looked at the IRS site. If you turn 70 in August 2015, then you are required to take the first RMD by April 2017, the year after you turn 70 1/2, not the year after you turn 70. If you wanted to avoid taking two distributions in the same year, then take the first before the end of 2016 and the next one in 2017, instead of waiting till April.
    This is what my CPA told me too.
    http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Required-Minimum-Distributions-%28RMDs%29

    by Cindy — March 25, 2015

  4. This helpful Comment came in from Mike, and concerns Federal employees and distributions from their TSP type plans:

    I have taken a look at that the information and do find it to be very informative.

    I was not able to find any information of the associated text on this topic, which would apply to Federal employees and their Thrift Saving Plan (TSP).

    I can’t be the only reader that is a Federal employee.

    I think TSP pamphlet TSP-775, will provide information to those that might want or need to continue to work past 70.5 years of age.

    See paragraph. 3.

    “Information About Required Minimum Distributions

    The IRC requires that you receive a portion of your TSP account (your “required minimum distribution”) beginning in the calendar year you become age 70½ and are separated from Federal service.2”

    2 If you separate after age 70½, your account will automatically be subject to
    the IRS minimum distribution requirements.

    Here is a link to TSP-775: https://www.tsp.gov/PDF/formspubs/tsp-775.pdf

    by Admin — March 25, 2015

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