Tick, Tick, Tick… Time Running Out to Take Your Annual RMD

Category: Financial and taxes in retirement

December 6, 2015 — If you have a 401(k) and/or an IRA, and you turned 70 and 1/2 in 2014 or earlier, you have a very big deadline coming December 31. That is the date by which you must take your annual Required Minimum Distribution (RMD), or face significant penalties. A surprising number of people fail to take these distributions. All of the money taken from regular IRAs and 401(k)s is taxable as ordinary income. There is an exception to this rule: the year you turn 70 1/2 you have until April 1 of the following year to make your first distribution (but if you wait until then you will have to take your second distribution by Dec. 31 of the same year). If you inherit an IRA or 401k you will likely have to take a RMD, even if you are not yet 70 1/2.

You must calculate your RMD on all of your retirement accounts, but you can withdraw it all from one account if you prefer. The company that administers your retirement account will usually help you calculate the amount you need to take out. Note: Amounts in your Roth IRAs are not subject to 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fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.

RMD %s change over time
The required distribution percentage starts at 3.65% at age 70 and goes to 15.87% at age 100. Here is a link to Vanguard’s RMD Calculator (Note that it uses a life expectancy factor which looks different, but works out to be the same as the percentages we just mentioned). Many financial advisors believe that this changing percentage makes a good way to take money out of your other retirement accounts. Since the withdrawal formula starts low and gets higher over time, it offers more safety than plans that take out steady amounts over time – the smaller distributions in early years make it less likely that you will run out of money in the long term.

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 December 5th, 2015

5 Comments »

  1. For the past several years, and maybe longer (i wouldn’t know as it didn’t affect me then), Congress has passed legislation stating that money distributed from a traditional IRA and given to a charitable organization is TAX FREE. Often the law is not passed until January of the new year, so you are taking a chance. But if you had planned to give anyway, it can be a win-win.
    This has to be done in a very specific way depending on where your IRA is held (ie. Fidelity, TIAA-Cref), so you’d need to call your financial institution to ask what they require for this to be accomplished. Even if you can’t get this together for 2015, there’s always next year. Season’s Greetings to all!

    by ella — December 6, 2015

  2. This can all be automated with whoever is the custodian of your IRA. They will calculate the RMD every year, withdraw it on the date you specify, and send it to the account you specify. Very simple to set up. You can even specify the amount of taxes you want withheld.

    by Linda — December 6, 2015

  3. Don’t forget if you inherited an IRA from a parent you need to take RMD as well. My Mother died at age 79 and had been taking RMD since 70 years old. After she passed, I had to take RMD from her IRA at age 61.

    Here is a calculator that may help you estimate what Beneficiary RMD you may have to pay. I just used it for ‘fun’ but will rely on my Financial Advisor in January to calculate what needs to be withdrawn in 2016. http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/ira_calculators/beneficiary_rmd

    I just found this calculator about a week ago and had no idea that the RMD goes up and up as the years pass. I thought it was a flat rate forever. That was an eye opener for me!

    by Louise — December 6, 2015

  4. The RMD percentage of withdrawal is low initially so that your account will last you for your expected years of remaining life. As your account decreases over time, the percentage of withdrawal needs to increase so that your annual income is somewhat stable until the end.

    by LS — December 7, 2015

  5. My wife and I will just be reaching 68 starting this month. We have a long-term budget which shows our retirement investments being withdrawn only at a 2% rate for several more years — long after RMD kicks in with it’s higher requirements. So while it’s not urgent, there are two major questions that I don’t yet have answers for:

    — Will our RMD(s) be calculated on our joint investments or our individual personal investment? We have filed taxes jointly for more than 40 years, so I have been assuming RMD will be joint.

    — If we only have a need for 2% annual withdrawal to maintain our long-term budget, but must withdraw almost twice that (and growing) for RMD, how will what we do with our withdrawn RMD affect future RMDs? It’s small to begin, so we will probably just put the extra in savings, but from year 2 onward, holding large funds in savings is not part of our investment strategy. I would ideally want to put the “excess” RMD into a new investment portfolio. Will that investment then also be subject to the RMD total I must consider? If so, it would be like double taxing the same funds. I would rather “blow” the money on enjoying life. At some point, the RMD formula becomes more consistent with inflation and costs could increase to exhaust the annual RMD, but life does not necessarily end at 85 and it’s prudent to plan at least somewhat beyond. (fyi, our budget plans says that our “funds” will last beyond 90 though we aren’t so sure our “fun” will last that long… :<)

    by Rich — December 10, 2015

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