Retirement Accounts: Required Minimum Distributions for First (RMDs) by April 1, 2014
When you reach age 70½, you are required to withdraw money from all types of retirement accounts with the exception of Roth IRAs. At what point in the calendar year you reach this age will determine whether or not you need to take a RMD this year or next. You probably haven't thought about your age in terms of "half a year" since you were 5, but the IRS has the rule stated as "You reach age 70½ on the date that is 6 calendar months after your 70th birthday."
Even if you are financially comfortable enough to, you cannot keep money in your retirement account indefinitely. Whether or not you actually need to take the money out is irrelevant. If you are retired, you'll have to withdraw funds from your retirement accounts after you reach age 70½. Of course, there are rules and formulas for figuring out Required Minimum Distributions (RMDs) every year.
The Date You Reach Age 70½ Will Determine the First RMD
The date you turn 70½ is important so we have outlined the calendar dates and two examples below that will make it clear for you.
If you are retired and your 70th birthday was on or before June 30 of the calendar year, you will reach age 70½ on or before December 30. If you fall into this category, you are required to take your first RMD before April 1 in the following calendar year.
If you are retired and your 70th birthday was on July 1 or after, you will reach age 70½ on January 1, or after. Therefore, you do NOT have to take an RMD the calendar year you turned 70. The first RMD will fall within the following calendar year.
RMDs Apply to These Types of Retirement Accounts
Calculating the RMD
The RMD for any year is the account balance at the end of the calendar year before the distribution date, divided by a distribution period from the IRS’s “Uniform Lifetime Table.” The IRS provides a worksheet which makes calculating your RMD easier. You have to take a distribution from each retirement account so you might need to use the worksheet more than once.
Here is an example:
In this example the IRA had a balance of $1,000,000. The person's age is 70 so the required RMD is $36,496. The distribution period is 27.4 from the IRS table and is based on average life expectancy. There is another table, Joint Life and Last Survivor Expectancy Table, you have to work from instead if you have a spouse that is more than 10 years younger and is the sole beneficiary of their IRAs.
Adjust Asset Allocation in Retirement Accounts Annually
Even before you take your first RMD, you should "adjust" your asset allocation for your retirement accounts annually. The equity markets have done well the past couple of years so if you're at or near retirement, hopefully you have listened to the experts and allocated your portfolio based on your age.
The experts recommend your retirement account be heavily weighted in less risky or zero-risk investment. Low risk means low return on your investments and this is especially true of the past 5 years. Currently, the best CD rates on 1 year certificates of deposit and the best savings rates are around 1.00 percent.
Avoid Having Two RMDs the Following Year You Reach Age 70½
You have until April 1 to withdraw funds for your first RMD but waiting until the new year will require you to have two withdrawals in one year. This will increase your tax bill and might put some of your income in a higher tax bracket.
Here is an example: Say you will reach age 70½ on June 30, 2014, you must receive your 2014 RMD by April 1, 2015. If you take the initial RMD for 2014 in 2015, then both your 2014 and 2015 distributions will be counted as income for your 2014 income tax return.
This will happen because after your first RMA, you are required to take each subsequent RMD by December 31. There is a way to avoid this by making your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.
Failing to Take RMDs
Failing to take RMDs isn't an option for you since the penalties are steep. If you fail to take any distributions or you don't take enough, you may be forced to pay a 50% excise tax on the amount not distributed. Make sure you keep track of all your retirement accounts especially if you worked for many different companies and have left the accounts with your employers' plans.
If you fail to take the required RMD any year you will have to report this to the IRS and have to file a another tax form Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts (Form 5329).
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