Calculating your RMD is relatively easy. RMD or Required Minimum Distributions is simply the minimum amount from your tax-deferred retirement account that are mandatory withdrawals when you reach the age of 72.
If you are now at the age of 72, you must probably be subject to taking an annual RMD. RMDs are also mandated by Uncle Sam or commonly known as the IRS (Internal Revenue Service). It’s important to know when you need to take RMDs to maximize your withdrawal and to avoid hefty penalties. Before you calculate the required minimum distribution here are important things to know:
How much and when should I withdraw?
The RMD amount you must withdraw is dependent on the account balance and life expectancy factor established by the IRS. Although the IRA custodian or retirement plan administrator may calculate your RMD, the IRA or retirement plan account owner is still responsible for calculating the amount of the RMD.
Also, if you have more than one account for a retirement plan account you may withdraw distribution from one or each account. RMD allocated for the year must be taken by December 31st of the same year. Although, on your first RMD you may get more time.
What type of plans requires RMDs?
RMDs are required to these following retirement accounts:
- Traditional IRA
- SEP IRA
- SIMPLE IRA
- Rollover IRA
- Typically 401(k), 403(b) plans, 457(b)
- Typically small business accounts
However, ROTH IRAs do not require RMDs. Tax deductions do not apply to this type of retirement plan account, benefaction to this account are with after-tax deductions. Nonetheless, RMD rules apply to inherited IRAs.
Note that last 2020 due to coronavirus pandemic, RMDs were temporarily waived. This was also applied to those who were required to pay their first RMD for the year 2019. Thus, taxpayers who turned 72 last 2021 are due to pay their required minimum distribution this April 21, 2022, and the next one by December 31st. If you’re turning 72 this year 2022, then your first RMD is due on April 1, 2023.
What if I don’t take RMD or withdraw too little?
If you don’t take your RMD, you will be penalized a hefty amount of money. To be exact, the IRS will tax you 50% of the difference between the amount you withdrew that year and the amount you were supposed to take out that year. Also, non-IRA retirement plans, such as 401(k) or 403(b) plans, may have different deadlines. It is best to speak with your plan administrator.
You don’t also have to take your RMD in one lump sum. Consequently, you make take increments throughout the year ensuring to take the total RMD each year by December 31st. In some cases, you may also delay your RMD. You do not have to take your RMD from your workplace plan until you terminate or retire.
Don’t forget that the IRS requires the IRA beneficiaries to claim the entire balance of the IRA by the end of the year, or on December 31 of the year when the 10th anniversary of the IRA owner falls and when they are not claiming the life expectancy payments. This is known as the “IRS 10 Year Rule.”
Additionally, you may withdraw more than the minimum distributions. Also, note that RMD rules apply differently to the original account owner and to beneficiaries with inherited ira.
To calculate the required minimum distributions, you must first check the IRS Publication 590 which has the RMD table. Then, you must track down your age on the IRS Lifetime Table. Beside it is the life expectancy factor that corresponds to your age. Lastly, divide your retirement account balance as of December 31 of the previous year by your current life expectancy factor.
Take note that calculating your RMD when your spouse is the only primary beneficiary and more than 10 years younger than you works a little differently. If this is the case, you must then use RS Joint Life and Last Survivor Expectancy Table which can also be found in the IRS Publication 590. The calculation doesn’t change, however, the life expectancy table is now based on your age and on your spouse’s age.
RMD Deadlines and Exceptions
On The first year that you are required to take an RMD, you may delay making the withdrawal until April 1 of the following year. But you’ll need to take another RMD by December 31 of the same year. The IRS taxes RMDs as ordinary income. Thus, you may not want to take two RMDs in one year since they count as taxable income.
The withdrawals will count toward your taxable income for the year and they will be taxed at your appropriate individual federal income tax rate and is also subject to state and local taxes. A tax professional can help you with this decision while a financial advisor with tax expertise can also help you figure out where and in what order to draw down your accounts.