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fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.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

27 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

  5. RMD Calculator: https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/ira_calculators/rmd

    by Louise — December 7, 2017

  6. I was just reading this article and it says you can take out your entire RMD from one account. My Hub has two accounts and I have 4. One is an inherited IRA that I already pay RMD’s on that account each year since 2013 since I was age 60. I assume that my Hub would have to take out his RMD from his two accounts and I would have to take from my 3 accounts plus the inherited one. I wouldn’t think we could combine all from just one account, could we?

    Also, we have taken some tiny withdrawals from our IRA’s for a few years now. We are taxed at 20%. The state gets 5% and the Fed gets 15%. I am interested in moving to a state that doesn’t tax RMD’s. Before RMD’s kick in we need to withdraw money from IRA’s for about 5 years and I have calculated from 2% of our income up to 4%. We could save money by moving but not a lot. However, with that and savings on home taxes it might be worth moving. Anyone have words of wisdom on moving to save money on RMD’s and house taxes?

    by Louise — December 7, 2017

  7. Louise, Several years ago I consolidated all of our IRA’s,/401K money. I had read at the time to simplify for the RMD requirement. We still have a few years until we’re 70 1/2. Our IRA withdrawal is just under 4% a year. 10% is withheld for fed tax. No state tax is withheld. The last two years all the federal tax money was returned. Our income is SS, IRA withdrawal and a small pension.

    Regarding real estate taxes here in Georgia. Once I turned 65 the school portion of our house taxes dropped off resulting in a tax bill of $1014.00 for the year on a 4 bedroom 3 bath house!!

    .

    by Jim C — December 8, 2017

  8. Jim C so glad to hear from you again! I asked you a bunch of questions last year and you were very helpful. I have more questions. Do you like the town you live in and if you were to move elsewhere in GA what place would you move to and why.

    How far is a hospital where you live (Lilburn). I think you said you had heart surgery, did you go to a local hospital or Atlanta?

    What do you think of Duluth? Reason I am asking is that I like to shop at Costco and I believe there is one there. Usually where Costco puts in a store there are other big box stores.

    Do you ever fly out of Atlanta and if so do you drive or have a limo service take you there. I am getting very nervous about driving these days and dread highway traffic. I go the back roads whenever possible.

    Your taxes make me very jealous! My taxes for a 3 bedroom 2 1/2 bath raised ranch house, average size, is $4751.00 a year. I also know from discussing with you, your GA Medigap Plan F is much cheaper than CT Medigap Plan F which would save the Hub and I money per year too.

    CT is in a financial crisis and our taxes may go up more soon. It is very discouraging.

    How is your garbage pick up structured? Is it part of your taxes or do you pay a per month fee. Here in my town I pay around $100+ every 3 months. We have no bulky pick up curbside. We have to pay someone to come and take stuff like that away. As always, thanks Jim!

    by Louise — December 8, 2017

  9. You should be able to consolidate your accounts so you’re each down to one. To me, having that many accounts would be a bookkeeping nightmare! I’m at the age where I need to take RMDs, but it’s all handled automatically by Fidelity once I set up the distribution plan. They’re responsible for choosing the correct amount.

    To avoid paying taxes on your RMDs which are considered income, you would have to move to a state with no income tax. It’s nice that Georgia gives seniors a break from school taxes. After all, we’ve been paying those for years and years. Unfortunately, Florida does not.

    by Linda — December 8, 2017

  10. Linda, I have a financial advisor who monitors our accounts. She has never suggested combining accounts and for one reason when interest rates were good, she had each account locked in for X amount of years. I think I am down to one account with a decent interest rate but that has to be done soon. She has invested the other accounts into good investments and we are making good money since the stock market has gone up. I will mention consolidation when I see her to see what she suggests. Georgia is very generous to seniors and they can claim a tax exemption up to $65K. Full time residents receive a homestead exemption from what I have read.

    School taxes in CT go up and up and there is no relief for Seniors on that. We shed a whole school in my town, From 5 to 4 schools and wouldn’t you think our school taxes would go down? NOPE, the Board of Education increased their budget and added this and that. They will not give back a penny and want more and more each year. In CT it costs on average $18K per kid per year from grade 1-12. This fluctuates from town to town. GA cost per student is around $9,200 per year per kid. https://education.cu-portland.edu/blog/classroom-resources/public-education-costs-per-pupil-by-state-rankings/

    by Louise — December 8, 2017

  11. Louise, Lilburn is more of a bedroom community with a very small downtown area. Shopping choices are somewhat limited in the immediate area. There is a Kroger grocery store about a mile from here and a Publix about 3 miles away. We moved here in 1992 and chose this area because of the schools. If I was moving here now and in retirement I would want to be farther outside of the city probably up towards the mountains. Nothing wrong with Duluth just have to contend with a lot of traffic. The closest hospital and the one I used is about 8 miles away. There several hospitals within 25 mile from here.

    The airport is about 35 miles south of here. I’ve always driven to the airport and left the car in airport parking. I recently checked on the cost of a limo round trip for my wife and I and they quoted $170.00. Weekly garbage pickup including recycling is included in our annual real estate bill. Hope this helps, please let me know if I can answer any other questions.

    by Jim C — December 9, 2017

  12. Maybe Admin should move these Georgia related comments to a Georgia subject area.

    Thanks Jim C. I am always full of questions! Appreciate your answers to my questions!

    WOW, on the garbage/recycling being included in your real estate taxes! Cost me over $300 a year on top of my taxes! How does the state of GA function if they are giving ta relief to seniors and collecting garbage without extra charge. CT is going broke and are cutting every thing. They want to shut down ALL the rest stops. They have laid off tons of state workers. They have no money for the infrastructure program to improve roads and bridges. The state has so little money they can’t even get bond money at a good interest rate. They may not be able to get bonds at any rate! They say the gas tax income has declined due to lower gas prices and people driving less mileage. Plus, electric cars are becoming very popular and they don’t require gas. Plus, people and corporations are leaving in droves.

    by Louise — December 9, 2017

  13. Louise, I live in Connecticut, but I prefer to look at my glass as half full rather than half empty. We spend $18,000 on each student’s education, rather than looking at it as a cost. That is twice as much as Georgia per student and public schools in Connecticut are ranked much more highly than Georgia’s. Our middle class suburb has voted for two bond issues in the past four years (by 75% Yes margins) for three new elementary school buildings to replace aging ones. I voted for them and have never had, nor will have any children or grandchildren in our schools. Schools are run here by the property tax and there IS a senior discount below a certain income level.

    by Clyde — December 9, 2017

  14. I guess what I’m saying is that for some people, paying higher taxes is worth the services and quality of schools, etc., those taxes provide. I am retired and by no means wealthy. My spouse didn’t work, so had no savings or retirement plans to draw on. My retirement assets are not large. I don’t have a pension, so am not even living on a fixed income. My income can actually go down, depending on the market values of what I’m invested in in my retirement account. The tax picture is not always the main reason some people choose a retirement place. It’s where you can afford to live and are hapoy. We live frugally and have always spent below our means. That said, we will likely move south later, but that is nearly exclusively based on family considerations, not dislike of Connecticut. It is a beautiful state.

    by Clyde — December 9, 2017

  15. DONATIONS from your IRA/401 directly to a qualified charity are not included in income. Does NOT increase your income but does allow you to give more.

    by Shumidog — December 9, 2017

  16. Clyde, I like CT but there are economic reasons to move. Connecticut’s economy is in very bad shape and is only going to lead to more taxes and less services.
    Savings in GA would be on RMD’s
    Savings on house taxes
    Savings on garbage/recycling
    Savings on Medigap Plan F
    Savings on Sales tax
    I do know of the CT senior discount but it is based on income and the town I live in gives a max of $960 and the State gives a max of $250. You may get less and if you make too much you get nothing. $32,200 for singles and $42,900 for married couples. Half of SS income is used to determine eligibility.
    I have been looking at real estate prices in GA and the prices are less than CT but there are many very expensive homes too that I couldn’t afford.
    Just roughly with just a few calculations, by moving to GA we could save at least $50K in 10 years time and that doesn’t include RMD’s.
    We have no real reason to stay in CT. No children or grandchildren very few relatives.
    My Hub did have surgery and radiation treatments these past two years and is doing very well now, I would hope we could find good doctors/hospitals in GA.
    http://www.politifact.com/georgia/statements/2015/nov/13/Kiplinger-com/georgia-tax-friendly-state-retirees/

    by Louise — December 9, 2017

  17. Louise, Generally the financial planner should be able to consolidate your investments by moving them “in Kind” which is a term they use. By that they mean no investments will sold or changed unless you request it. We had a 10yr CD bought in 2008 paying 4.5%. They were able to move it from the bank to the consolidated IRA unchanged.

    by Jim C — December 9, 2017

  18. Thanks Jim C, Good information!

    by Louise — December 9, 2017

  19. Thanks folks for moving the conversation back to the topic, RMDs. By the way, the point of the story is coming due – make sure if you were 70 and 1/2 this year that you take your distributions (you have until April 1 if you actually turned 70 1/2 this year, but then you will have to take another distribution before the end of 2018). Some good suggestions here, thanks. If you want more on Georgia, go to our “Dueling Retirement States” article on the South: Kentucky, Alabama, and Tennesee – https://www.topretirements.com/blog/great-towns/retirement-in-the-mid-south-comparison-kentucky-tennessee-georgia-and-alabama.html/

    by Admin — December 10, 2017

  20. Folks I have a quick question once you turn 70.5 and you must take the RMD what can you do with the money if you don’t need it? Can you put the money into a new IRA, a Roth or some other retirement fund? Just curious since no one covered that topic. Will there be different tax consequences to consider?

    by Skip P — December 10, 2017

  21. Yes, it can be reinvested.

    by Kim — December 10, 2017

  22. Skip P, here are some ideas: https://www.fa-mag.com/news/what-if-your-client-doesn-t-need-the-rmd-19538.html

    Also, you could think about investing the money into your house for upgrades. Like modernizing the kitchen, new roof if needed, new heating system if needed, new carpeting/flooring, new sidewalks if needed, new siding, gutters, upgrading bathrooms, painting interior, new windows/doors. Invest in real estate for a rental property for income, prepaid funeral costs, headstone, etc. fencing, new furniture, new car. Some people buy small businesses like a liquor store, laundramat, drycleaners. How about a well earned vacation to a Caribbean island? Open IRA’s for grandkids.

    by Louise — December 10, 2017

  23. Skip, great question that is not covered very often. Yes you can invest back into a Roth after you turn 70.5, within certain income limits. See https://www.irs.gov/retirement-plans/roth-iras You cannot contribute to an IRA after you reach that age, unless you are still working. https://www.kiplinger.com/article/retirement/T032-C001-S003-the-age-cutoff-for-ira-contributions.html Some employees who are still working do not have to take RMDs.

    The article provided by Louise has some good ideas, but we see one factual inaccuracy. While you can send money to a qualified non-profit as part or all of your RMD (up to certain limits) and thus escape counting that money as income, you cannot also deduct that from your income taxes. That would be double dipping.

    by Admin — December 10, 2017

  24. Thank you Admin for answering my question regarding reinvesting RMD and providing additional website for RMD research. Very Helpful!

    by Skip P — December 11, 2017

  25. Louise thank you for your input regarding my RMD question.

    by Skip P — December 11, 2017

  26. DONATION If there is a qualified charity or charities you regularly donate to you fill out a form with your IRA company/bank and they send the money directly to the charity. This way the RMD does NOT increase your income for tax purposes, you do NOT pay income tax on this money, and the charity gets more to spend on their mission be it saving children, dogs, cats, other pets, public TV, etc. Be sure that the charity is listed with the IRS as qualified and ask the charity as well.

    This was put in the tax code years ago for those who wanted to do good with their money and was made permanent in 2013.

    by Shumidog — December 11, 2017

  27. Clyde,
    I also live in CT. Like you, I have no children, or other relatives that would use the school system in our town.

    I supported the schools and by being the Chair of the School Building Committee, I was able, with the rest of the committee, to convince the voters of our town to approve on the first ballot a $10 million bond. This town never had bonded or had any debt.

    As chair of the Financial Planning Board, in addition to developing and presenting the town budget and allocation of the amount allowed for the school budget, we also had to set the mill rate.

    I also observed the School Board in negotiations on the teachers contract.

    I learned a lot from these experiences. They gave me much more than I gave to the community and to the future of the children of our town. As we retire, these types of experiences may help communities in areas they may not have strengths.

    Don’t forget to help your local government/community by volunteering to be on boards/committees, and as necessary to run for these committees to continue to help.

    by Trappercat — December 12, 2017

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