Five Things to Know about Taking Your RMD

When you retire, the government makes you take money out of your IRA, it's called Required Minimum Distributions RMDs.

We all want to have enough money to retire with. We also have to remember about paying tax on that money as well.


An RMD is a Required Minimum Distribution.  That’s the money that you’ve saved up in an IRA or a 401(k) for all these years.  Remember how you got a tax deduction for saving that money?  Well, that was only temporary and the time will come when the IRS wants their tax money back!  Here’s what you need to know!


Number 1:  Required Minimum Distributions (RMDs) start at age 70 and 1/2.  If you turn 70 on June 30th, you need to take an RMD distribution that same year.  If you turn 70 on July 1st, you can wait until next the year.


Number 2:  If you screw up and miss the December 31st deadline the first year, you still have until April 1st of the next year to get it done.  That’s only good for the first year though.  The downside to taking your distribution on April 1st  is – you still have to take your second distribution by December 31 of that year.  That means you’ll be hit with two years of  RMD income on your tax return instead of just one.


Number 3:  If you don’t take your RMD, the penalty is 50% of what you should have taken out in the first place.  Fifty Percent!  Let’s say you have $500,000 saved up in your IRA.  The first year RMD on that account should be $18,248.*  If you didn’t take your RMD, the tax penalty would be $9,124.  That’s not a typo.  You’d pay over nine thousand dollars as a penalty for not taking your RMD.    Ouch!  As as you can see, it’s really important to make sure you take your RMDs!  (Sounds kind of like a vitamin, doesn’t it?)


Number 4:  People often ask me if they can take more out of their accounts than the RMD.  The answer is yes you can!  It’s your money, you may take as much of it out as your want, you just have to pay the tax on it.  The RMD is just the minimum that you’re required to take.


Number 5:  But if you do take out more than the RMD, you can’t apply that amount to the RMD that you need to take out next year.  For example:  let’s say that instead of taking out $18,248 like we did in that earlier example, you took out $30,000.   Your RMD calculation for the next year would be $17,736.  You’d still have to take the whole $17,736, you couldn’t apply the extra $11,752 that you took the year before to only take $5,984.


So if you’re nearing 70 and 1/2, be sure to consult your financial advisor to make sure that you are receiving your Required Minimum Distributions on time to avoid a penalty.


*Using the Uniform Lifetime Table for RMD distributions, the distribution period for someone who is 70 years old is 27.4.  To compute the RMD on $500,000 take $500,000 divided by 27.4 = $18,248.


**Using the Uniform Lifetime Table for RMD distributions for someone who is 71 years old with $470,000 remaining in their IRA you’d take $470,000 divided by 26.5 to get $17,736.