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Now that you’re nearing retirement or have reached your golden years, it may be time to shift your attention from how to save more to how to properly withdraw the savings from your accounts.
Learn about Required Minimum Distributions (RMDs), from what they are to tax tips that help you get the most out of your withdrawals.
A Required Minimum Distribution refers to the minimum amount you must withdraw on an annual basis from your retirement plan. They apply to all employer-sponsored retirement plans — 401(k)s, 403(b)s, 457(b)s, etc. — as well as Traditional Individual Retirement Accounts (IRAs), IRA-based plans (SEPs, SARSEPs, SIMPLE IRAs), and Roth 401(k) accounts. RMDs do not apply to Roth IRAs (until after the death of the account owner) or non-retirement accounts.
Generally speaking, you are required to begin receiving RMDs by age 70 ½. On the flip side, you can begin making tax-penalty-free withdrawals from your retirement accounts at age 59 ½.
According to the IRS, your RMD is calculated for each retirement account by taking the balance of the account as of December 31 of the year prior to you turning 70 ½ and dividing that number by a life expectancy factor. Note: You must recalculate your RMD each year based off your balance from December 31 of the previous year.
There are a number of factors taken into account when calculating your RMD, such as the age of your spouse. You can learn more about life expectancy factors via tables found in the IRS publication, “Distributions from Individual Retirement Arrangements.”
As mentioned above, you are required to start withdrawing from your retirement accounts at 70 ½. That means that you must take your first payment by December 31 of the year in which you turn 70 ½.
However, you can delay your first payment — and only your first payment — until April 1 of the year after you turn 70 ½. If you wait to delay your first RMD, you must still make your second RMD withdrawal by December 31 of that same year. For example, if you turn 70 ½ in May 2017, your first RMD is due by December 31, 2017. If you choose to delay your first RMD, it must be withdrawn by April 1, 2018. Then, your second RMD would be due by December 31, 2018. Note: Making multiple withdrawals in a year has tax implications (more on that later).
It depends. If the account is an IRA, then you must begin making RMDs at 70 ½, regardless of whether you’re still employed or not. If it’s a 401(k) or other company plan, you might be able to delay withdrawing your RMDs due to the “still working” exception.
You can qualify for the “still working” exception if:
If for some reason you forget or you do not withdraw your full RMD for a specific year, there is a 50% tax penalty on the amount that is not taken. So, if your RMD is $60,000 and you only withdraw $30,000 in a given year, you will have to pay the IRS $15,000, which is far more than the income tax you would pay if you had withdrawn your full RMD.
In addition to paying the tax penalty, you’ll also have to file Form 5329 (used if you owe the IRS any retirement plan penalties) with your federal tax return for that year.
According to the IRS, the tax penalty can be waived if your reason for not withdrawing the full RMD was a result of a “reasonable error” and reasonable steps are being taken to remedy the shortfall. However, you’ll still have to file Form 5329 and attach a letter that explains why the full amount was not withdrawn.
In this case, the entire benefits of the retirement account are distributed to the beneficiary in one of two timelines:
Note: Roth IRAs do require RMDs after the death of the account owner.
Withdrawals from retirement accounts (not including Roth IRAs) are taxed as ordinary income based on your tax bracket.
U.S. News recommends these options to limit the taxes you’ll pay on your withdrawals:
While there are some tactics that can limit your tax payments on your RMDs, it’s important to note that RMDs cannot be rolled over into another tax-deferred retirement account. Also, remember that these tax tips do not apply to Roth IRAs since contributions are made after taxes and therefore the withdrawals are not taxed.
You should always understand the tax consequences of a withdrawal before initiating one, so consult a tax advisor about your situation.
There is much to know about how to withdraw from your retirement accounts. To learn what plan best fits your needs, schedule a Citizens Retirement Checkup at your nearest Citizens Bank branch.
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