The good part about putting money into retirement accounts is that the money can build on a tax-deferred or tax-free basis, depending on the account. But the IRS does not allow that tax-free designation to continue forever. There is a time when you have to make “required minimum distributions” (RMD) from your traditional IRA account based on your “required beginning date” (RBD).
When Should I Start My Withdrawals?
If you have money in a traditional IRA, you generally must start withdrawing a required amount beginning on the first day of April in the year after your 70½ birthday. For example, let’s say your 70th birthday was June 30, 2014. You reached age 70½ on December 30, 2014. You must take your first RMD, for tax year 2014, by April 1, 2015. Roth IRAs do not have an RBD.
According to the IRS, once this age is reached, you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½) and an additional withdrawal by December 31 (for the year following the year you turn 70½.)
- You own the IRA-sponsoring business: The IRS also states that if you own 5% or more of the business sponsoring the plan, you must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70½.
- You withdraw early: If you meet certain conditions, you are able to withdraw money (make a distribution) before age 59½. Generally speaking, if you do this and do not meet specific criteria, you will pay a 10% penalty on the amount withdrawn. If the money is withdrawn from a 401(k) plan, it is taxable, plus it also incurs the 10% penalty.
There are also times when you can make early withdrawals. For instance, paying bills for “post-secondary educational schooling” is permitted. This includes tuition, books, supplies and room and board. You can also withdraw up to $10,000 if you are a first-time homebuyer, but keep in mind that you also have to pay income tax on the withdrawal.
How Much Do I Need to Withdraw?
Calculating the RMD is based on using a Uniform Lifetime Table, available from the IRS. This simple worksheet (PDF) walks you through the four-step process for each of your IRA accounts. Keep in mind that the RMD is based on the account balances in all of your company plans, including IRAs, SEP-IRS and SIMPLE IRAs. These balances should be totaled on December 31 of the year before you take your first distribution. Also note that Roth IRA balances and inherited IRAs are not included in this amount.
Using our previous example with the formula from the linked worksheet, let’s say you saved $150,000 in your only IRA account by the time you reach 70 ½ in 2014. Divide 150,000 by the distribution period value for age 70, which is 27.4, and the result RMD is $5,474. Note that your RMD will change each year as you grow older, so keep that worksheet handy. Remember that you can withdraw this amount in any increments you like, but by year-end, the entire RMD must be withdrawn.
If your spouse is 10 or more years younger than you, your RMD formula will differ slightly (PDF), as it takes your spouse’s age into account.
Are There Tax Considerations I Should Consider?
First and foremost, IRA income is taxed as regular income (e.g. W-2, Social Security), so you may want to consider your overall tax burden when making your RMDs.
Because of this, there’s a possibility that both your first and second IRA withdrawals will be made in the same calendar year. If that happens, you’ll have both amounts taxed in the same year, which may or may not be advantageous to you.
To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70 ½ instead of waiting until April 1 of the following calendar year. This date only applies to your first distribution. After that, you must make your RMD by December 31 in each subsequent year.
Are There Any Penalties for Not Withdrawing by the Deadline?
If you do not make the RMD on your RBD, you will be fined 50% of the withdrawal amount, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. Most people think the IRS will never catch them if they miss this important date, but starting in 2004, institutions holding your IRA money were required to alert the IRS when you made a distribution. So if you don’t want to risk paying a hefty fine, take this warning seriously.
It is possible to have the penalty waived, provided that you can prove an acceptable reason to waive it.
RMDs for Beneficiaries After an IRA Owner’s Death
In the event of the IRA owner’s death, the IRS also has rules for beneficiaries who either die on or after the required beginning date or before the required beginning date. These rules are clearly stated in this table.
While IRA money commonly is penalized with a tax if it is withdrawn before the IRA owner reaches age 70½, there are some situations when this money can be withdrawn without incurring the penalty. This will happen if you die, become disabled, need funds to pay medical expenses, elect to annuitize your withdrawals or need money to pay federal taxes.