Everyone loves tax-free money, and that’s sometimes how people think about the money they save for retirement. But as you near your 70s, the IRS wants its cut of those savings. At a certain age, you must withdraw a certain portion. It’s fairly straightforward if you follow certain guidelines. Actually, in certain instances, withdrawals remain tax-free. Learn more about the Required Minimum Distribution (RMD), so you’re well prepared when the deadlines arrive.


Calculating RMDs

First, a Required Minimum Distribution differs from an early withdrawal from a traditional IRAs. The latter can incur a 10% tax penalty if you withdraw before the age of 59 ½. RMDs begin once you reach the age of 70 ½, and apply to 401(k)s, 457s, and 403(b)s, as well as rollover, traditional, SIMPLE, SEP, and inherited Roth IRAs. Distributions must be taken by December 31 each year. However, first-timers get the option of extending that deadline to April 1 of the year following the 70 ½ mark. If you do choose that option for your first time, note that you will be responsible for two payments (April, plus that year’s December deadline).

To calculate your Required Minimum Distribution, refer to the IRS’ Uniform Lifetime Table:

  • Find the “Life Expectancy Factor” that matches your age
  • Divide your account balance as of December 31st of the previous year by that number
  • Do this for each retirement plan

If your spouse or partner is more than ten years younger than you, and the sole beneficiary of your savings plans, follow the same steps above, using the Life and Last Survivor Expectancy Table.

Beneficiaries who inherit plans before the original owners turned 70 ½ can delay withdrawals until the deceased would have reached that age.

You can take the total RMDs from one account unless it is a 401(k), which requires its own withdrawal. Whether you take payouts regularly in one lump sum, you choose whether to spend or reinvest it.


A Required Minimum Distribution Counts as Taxable Income

As Form 8606 notes, RMDs count as taxable income. They are subject to a fee if you do not take them or withdraw less than the assessed amount. The penalty is 50% of the difference between the amount you withdrew and what you should have. Additionally, you’re still responsible for having to take the RMD for that year. If you miss the deadline, or miscalculate the amount, request a penalty waiver through Form 5329 Additional Taxes on Qualified Plans.

Non-spousal inheritors can start RMDs by Dec 31 of the year after the year that the plan-holder passed away. If the plan-holder died before April 1 of the year following the year that they turned 70 ½, then beneficiaries can apply the 5-year rule to RMDs. This allows for you to withdraw any amount at any time until December 31 of the fifth anniversary of death. The monies are still taxable but do not incur penalties.


What if You Don’t Retire at 70 ½?

According to the Employee Benefit Research Institute’s March 2016 Retirement Confidence Survey, 67% of workers nearing or at retirement age intend to continue working. If you have not retired by age 70 ½, you may be able to delay RMDs until April 1 of the year that you do stop working. Criteria depend upon the type of savings, whether it is employer-sponsored, and if you own less than 5% of the place of employment.


Apply IRA Withdrawals to Tax-Free Qualified Charitable Distributions

If your finances are secure enough that you don’t need RMDs, consider donating the money. IRA withdrawals made as Qualified Charitable Distributions (QCDs) are non-taxable, up to $100,000 a year. Plus, spouses can match that maximum donation, if your file jointly. The organization(s) must be registered as non-private 501(c)(3), and receive the contributions directly from the accounts.


Use RMDs to Your Advantage

Regardless of how you spend, invest, or donate your RMDs, they’re the result of your savings, and that’s something to be proud of. Do what you think best with the annual withdrawals, and enjoy the opportunities that the money presents.


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