Remember the first day you put money into your retirement account? You have seen your retirement account grow over the years and you have been blessed because you have never had to tap into it. Now the grandkids are your new focus and you have decided to just pass it on them since you will never need it. You have just turned 70 and a friend of yours in a similar situation is griping because they had to pay taxes on their retirement plan because they had to take money out. Puzzled about the IRS rules you do some research and you learn about Required Minimum Distributions. We’ll call them RMD’s for short.
It’s Time To Take Your Distributions
The beauty of investing in retirement plans is the tax deferred growth. All these years you’ve seen your account grow but never had a 1099 you had to report any of those gains on. You planned well enough were you have prolonged withdrawing even longer now, but you can only hold out for so long. The IRS is chomping at the bit waiting to get some of that tax money back. They do so with RMD’s by making you take out a portion of your retirement account each year and pay the respective tax on it. If you don’t take it out, you get taxed 50% of the amount that you should have taken. That’s a pretty stiff penalty that you want to avoid.
When do RMD’s have to start?
The IRS says you must start by April 1st following the year that you turn 70 and a half, and you must do it each year ongoing. Some retirement plans will allow you to postpone withdrawing so long as you are still employed by that company. Keep in mind that April 1st is for the first year and the first year only. After the first year, it falls back to a calendar year schedule and must be withdrawn by December 31st.
RMD Example
Somebody born on July 1, 1938 would not turn 70.5 until January 1, 2009. That means that they would not have to take their first RMD until April 1, 2010 (which would satisfy 2009 RMD requirement). They would, however, be required to take another distribution that year by December 31, 2010 to satisfy for that year. Each year following would follow the December 31st deadline.
How much do you have to take?
The amount will also be based on the previous year’s balance in your retirement plan. For example, to figure your RMD for 2008 you would take the value of your plan as of December 31, 2007.
The amounts to be withdrawn are based of life expectancy tables issued by the IRS which factor in your age, your beneficiary’s age, and your relationship with your beneficiary. Based on the 2008 Uniform Life Expectancy Table, you can expect to be required to withdraw 3.65% of your retirement plan when you turn 70.5. It then increases to 3.77% the next year and increases each year ongoing. The IRS tables are named:
- Single Life Expectancy
- Joint Life and Last Survivor Expectancy
- Uniform Lifetime
The tables are helpful, but nowadays calculators are used to compute the amount with ease. Please seek guidance from a financial professional to ensure that you are taking your RMD’s correctly.
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Jeff Rose, CFP is the owner of Good Financial Cents, a Financial Planning and Investment Blog by a Certified Financial Planner with a goal of helping you make "Cents" of your investments.
Article copyrighted by Jeff Rose. Content published with author's permission.
