Required Minimum Distributions…

You’ve been socking away money for thatt blissful day when you can finally say, “I’m retired!”. And, at least part of that money probably went into an account before you paid taxes on it.

“This is great,” you thought. “I’m saving all this money tax-free!”

Wrong! When you made that deal with the Devil otherwise known as Uncle Sam, he said you could save that money tax-deferred. Not tax-free. You didn’t really think you would get away without paying taxes on that money, did you?

Uncle Sam always get his money! For qualified investment accounts, it’s called an RMD and Uncle Sam will come to collect when you turn 70 1/2.

What is an RMD?

Simply put, RMD is short for Required Minimum Distribution, and it’s the minimum amount the IRS requires you to withdraw from your qualified retirement accounts every year once you reach the age of 70 1/2. You must follow the rules set forth for RMDs if you contribute to a retirement plan with pre-tax money. The following plans are subject to an RMD:

  • Traditional IRAs
  • SEP IRAs
  • Employer Sponsored Profit-Sharing Plans
  • 401(k) Plans
  • 403(b) Plans
  • 457(b) Plans

Remember, the reason the IRS requires you to take a distribution from your account is because they want to collect taxes on it. RMDs in general are subject to federal, and in some cases, state income taxes. You should consult your plan administrator and/or tax advisor to confirm which plans you’ve contributed to and which withdrawals from your accounts are taxable.

When do you have to take your RMD?

The IRS requires you to begin taking your RMD when you turn 70 1/2. You must take your first RMD no later than April 1st following the year in which you turn 70 1/2. All subsequent RMDs must be taken no later than December 31st of that year.


Let’s say you turn 70 1/2 on June 4, 2014. You can take your first RMD any time between that day and April 1, 2015. This covers your RMD for 2014. Your next distribution is due before December 31, 2015, and it will cover your RMD for 2015. Yes, that’s two in one year, but you’ll only have to do it once a year before December 31st every year after that until you die or your account hits zero.z

It’s important to point out here that you have two options for your first RMD. You can take it in the calendar year in which you turn 70 1/2 or wait and take it before April 1st the following year and take two distributions in one year. Your decision to wait and take two distributions in the second year, or take your first distribution in the year you turn 70 1/2 would be made based primarily on your tax situation.

To determine how much your RMD will be, your advisor or plan administrator will take your prior year’s December 31st IRA account balance, look up your age on the appropriate table (like the one below), and divide your account balance by the factor (remaining distribution period) based on your age.


You had $100,000 in your IRA on December 31, 2013. You turn 70 in January 2014 and decide to take your first distribution before the end of the year in which you turn 70 1/2. In this example that would be still be 2014.

$100,000 / 27.4 = $3,649.63

This is the amount you must withdraw for the calendar year in which you turn 70 1/2.
No matter which method your choose, PLEASE DON’T WAIT UNTIL THE LAST MINUTE TO TAKE YOUR RMD! There’s paperwork involved. And trust me, you don’t want the IRS angry with you if you slip up and forget about it. Keep reading to find out why.

What are the penalties for missing the due date?

If you’ve read this far, I’m sure you understand that taking your RMDs on time is important. But just in case you haven’t, let me point out that the penalty for not taking a required minimum distribution is a tax of 50% on the amount that was not withdrawn in time. Yep, you read that right, 50%. So, please contact your financial advisor and get your RMD scheduled.

The Dreaded D’s: Death and Divorce

Your marital status is set on January 1st of each plan year. So, if you’re married as of January 1st this year, you will still use the RMD rules for a married person even if things go badly and you get divorced later in the year. The same is true if your spouse passes away during the year. Divorces and deaths are not officially recorded on your IRA until the next year.

This can have an impact on a number of calculations for your RMD, particularly the life expectancy calculation. Your RMD is calculated based on either your life expectancy or a joint life expectancy while your spouse is still living.

Check with your plan administrator or financial advisor if either of the dreaded D’s happen to you.

Can you get out of taking an RMD?

The short answer is no. But, there are certain circumstances that will allow you to DELAY your RMD.
If you are still working and contributing to your retirement plan when you reach age 70 1/2, you may defer your RMD each year until you retire. There is a caveat here. This exception does not apply to you if you own more than 5% of the company you work for. You must meet all three of these qualifications to delay your RMD.

One last thing…

Maybe you’ve been an extra zealous investor (and I hope you have) and you have contributed money to more than one qualified retirement account. You must calculate an RMD amount for each plan separately. You have options regarding which account you would like to take your distribution. You can go ahead and take the RMD amount you calculated from each account or you may take the combined amount in a distribution from one plan. This is called aggregation and should be discussed with your advisor.

Remember it’ retirement we’re talking about. The more you know and understand, the better off you will be.

Best Regards,