How does that work, again? Well, when you save money in a retirement plan, eventually you are forced by law to start making annual withdrawals in the form of RMDs, beginning no later than your age 70 ½. Of course, you may choose to make withdrawals sooner (after your age 59 ½), but you cannot wait longer than 70 ½). The RMD requirements apply to:
- traditional IRAs (not Roth IRAs)
- pension plans
How are you to know what that minimum amount is? In most cases, your custodian (a bank, mutual fund company, insurance company, or brokerage firm) will calculate the RMD for you and each one will tell you what you need to withdraw for the account you have with that institution. If you have more than one account, you may choose to take enough out of just one of them, as long as you take enough to cover the RMD for all your retirement accounts.
If you just turned 70 ½ in 2016, there’s a “grace period”, and you may delay your first withdrawal until April 1 of the year following the year in which you turn 70½.
What’s the “or else” associated with not taking the RMD? If you don't take your RMD or you take too little, an IRS penalty equal to 50% of the amount not distributed may apply. What if you don’t need the money? Have your withdrawal deposited in a “non-qualified” (non-retirement) account in your bank or brokerage account.
It happens often – we’ll be talking to clients here at Rebecca W. Geyer & Associates about their estate plans and mention the RMD requirement. They will have heard about the RMD, but most don’t understand why, if they don’t want to take out money, they still have to.
Look at it this way, we explain. The IRS has been very, very patient with you, allowing your money to grow tax-free for many years in order to help fund your retirement needs. But the IRS is not willing to give you a totally “free pass” on those taxes. You’re of an age to be retired (whether you are or not); now it’s time for us to collect at least some of those “back taxes” on the money.
Just a reminder…if you’re 70- ½ or older, it is not (but almost is) too late to take your RMD!
- by Rebecca W. Geyer