EMPLOYEE BENEFIT PLANS
“When do I need to start taking my money?” – Required Minimum Distributions
Kimberly A. Reed
02 November 2017
One question we are commonly asked is “When do I need to start withdrawing money from my retirement account?”. The rules related to required minimum distributions (RMD) are confusing and failure to take money when required can result in a large penalty. The following should help to explain when you need to start withdrawing your money.
In most cases, you must start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.
Your required minimum distribution is the minimum amount you must withdraw from your account each year. You can withdraw more than the minimum required amount and your withdrawals will be included in your taxable income excluding any part that was previously taxed or that can be received tax-free (such as qualified distributions from designated Roth accounts).
The required minimum distribution for any year is equal to the account balance at the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.
The beginning date for your first required minimum distribution for an IRA (including SEP and SIMPLE IRAs) is April 1 of the year following the calendar year in which you reach age 70½. For a 401(k), profit-sharing, 403(b), or other defined contribution plan, the date is generally, April 1 following the later of the calendar year in which you reach age 70½, or retire.
The Internal Revenue Service (IRS) provides the following examples regarding turning age 70 ½: You reach age 70½ on the date that is 6 calendar months after your 70th birthday.
Example: You are retired and your 70th birthday was
June 30, 2013. You reached age 70½ on December 30,
2013. You must take your first RMD (for 2013) by April 1,
Example: You are retired and your 70th birthday was July
1, 2013. You reached age 70½ on January 1, 2014. You
do not have an RMD for 2013. You must take your first
RMD (for 2014) by April 1, 2015.
It is always important to check the terms of your plan for
rules specific to your plan. The plan’s terms may allow you to
wait until the year you retire to take your first RMD (unless
you are a 5% owner). Alternatively, a plan may require you to
begin receiving distributions by April 1 of the year after you
reach age 70½, even if you have not retired.
For each subsequent year after your required beginning date, you must withdraw your RMD by December 31. The first year following the year you reach age 70½, you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½) and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both amounts included in your income for the same year, you can make your first withdrawal by
December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.
Example: John reached age 70½ on August 20, 2013. He must receive his 2013 required minimum distribution by April 1, 2014, based on his 2012 year-end balance. John must receive his 2014 required minimum distribution by December 31, 2014, based on his 2013 year-end balance.
If John receives his initial required minimum distribution for 2013 on April 1, 2014, then both his 2013 and 2014 distributions will be included in his income on his 2014 income tax return.
If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed. It is important to make sure you understand these rules and take your RMD when it is required. You have worked hard to save for retirement and now it is time to start enjoying it.
Want new articles before they get published?
Subscribe to our Employee Benefits Newsletter.