Required minimum distributions, or RMDs, are something that retirees and those who plan to retire need to learn about. Those who don’t could be in for some pretty unpleasant — and expensive — surprises.
So what exactly is an RMD? According to the IRS, it’s the minimum amount of money you have to withdraw from a retirement account every year. Usually, you have to start taking RMDs from IRAs, SEP IRAs, SIMPLE IRAs or retirement plan accounts when you hit age 70½.
There are deadlines by which RMDs must be taken; otherwise, the account owner is subject to penalties in addition to taxes—and the penalties are pretty stiff. So this is not something you want to mess around with.
Here are 10 things you need to know about required minimum distributions:
10. Owners of Roth IRAs don’t have to take RMDs.
In fact, Roth owners can leave the money in there for their heirs to enjoy, if they so desire.
Roth accounts are funded with after-tax dollars; therefore, when the time comes during retirement that you do need the money, you can withdraw all contributions, and the earnings on those contributions, tax-free.
Now, about those heirs: there are rules that govern their withdrawals from an inherited Roth, and they will be subject to taxes on the money. In fact, they will be subject to RMDs—but that’s a separate matter.
9. RMDs must begin before April 1 of the year after the retirement account owner turns 70½.
In other words, if you turn 70½ some time this year, you’ll have to begin taking money from your retirement account(s) before April 1 of 2018—unless you haven’t yet retired.
If you are a 5 percent owner of the business sponsoring the retirement plan, though, RMDs must begin once you turn 70½, even if you haven’t yet retired.
But say you’re not a part owner of the business and you have retired: You need to take that first RMD before next April 1.
The RMD you take before April 1 of 2018 as mentioned above, by the way, is for tax year 2017; come December 31 of 2018, you have to take another RMD, this time for tax year 2018—because once you’ve turned 70½, the deadline changes, and withdrawals must be made by December 31 of all subsequent years lest you get nailed for a 50 percent penalty on the amount of the withdrawal.
8. RMD rules apply to all employer-sponsored retirement plans.
That includes profit-sharing, 401(k), 403(b) and 457(b) plans. The rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs.
7. The IRS provides tables used to calculate the amount of the RMD for each account.
Yes, that’s right—you have to calculate the RMD for each retirement account you have.
The tables provided by the IRS are for life expectancies: the Joint and Last Survivor Table is used if the sole beneficiary of the account is your spouse and your spouse is more than 10 years younger than you, while the Uniform Lifetime Table is used if your spouse is not your sole beneficiary or your spouse is not more than 10 years younger and the Single Life Expectancy Table is used if you are a beneficiary of an account (an inherited IRA).
6. You have to calculate RMDs separately, but you can take all the money from a single account.
At least, you can if we’re talking IRAs and 403(b)s here.