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Retirement Planning > Saving for Retirement

10 Things About RMDs You Need to Know

By Marlene Y. Satter, BenefitsPro

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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.

(Related: Follow the RMD and Your Clients Won’t Go Broke in Retirement)

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.

(Related: Working Past 70½? Skip the 401(k) RMD Without Penalty)

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.

RMDs kick in after you reach a certain age. (Photo: Bigstock)

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.

RMDs apply to all employer-sponsored retirement plans. (Photo: Getty)

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).

RMDs require certain calculations, depending on the retirement account. (Photo: Getty)

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.

While you have to go through the aggravation of separate calculations for each account, you don’t have to take as many withdrawals as you have accounts; instead, you can opt to take the money from one or more accounts.

Related: Are we facing a future of subdued home demand even as retirees want to sell?

But—and this is important—RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, do have to be taken separately from each of those plan accounts. Go figure.

5. You’re the one left holding the bag if the calculation isn’t done right.

Yes, even though your IRA custodian or retirement plan administrator may calculate the RMD—in fact, the IRS says that an IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner—you, as the account owner, are the one who’s ultimately responsible for calculating the amount of the RMD.

So make sure you check their work.

 You must take a minimum of the RMD but you can take more. (Photo: Getty)

4. Remember, it’s required minimum distribution.

That means you can take more than that if you want, or need, to. But you can’t take less.

Oh, and you can’t apply the extra to next year’s RMD—that starts the clock (well, the calculator) ticking again.

3. And the penalty gets really expensive if you fail to take the required minimum on schedule.

It bears repeating that if you fail to take an RMD on time, you’ll be hit with a penalty of 50 percent on the amount that should have been withdrawn.

That means that if you were supposed to take $10,000 by December 31 and didn’t, you’ll get penalized $5,000 for the omission. (If you only took $5,000, you’ll get stuck for a $2,500 penalty on the $5,000 you didn’t withdraw.)

That’s money you could have spent on your retirement, so make sure you take it, even if you don’t spend it. In fact, you could put it into savings or reinvest it, if your budget is that comfortable—but don’t just watch it go up in smoke.

There are ways to get the RMD penalty waived by the IRS. (Photo: Diego M. Radzinschi/NLJ)

2. There are ways to get the penalty waived.

But seriously, do you want to go through all that?

Still, if you can convince the IRS that your failure to withdraw the full and correct amount “was due to reasonable error and that reasonable steps are being taken to remedy the shortfall,” you might be able to avoid the penalty.

To qualify, though, you have to file Form 5329 and attach a letter of explanation. Make it good.

1. RMDs are taxed at your regular tax rate.

So, depending on your tax bracket, that’s the percentage you’ll be paying not just on any regular income but also on your RMDs.

And before you ask, no, you can’t take that money and roll it over into another tax-deferred account. One way or another, you have to pay the taxes on it.

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