Do I Really Have to Take RMDs?
Yes! Required Minimum Distributions, “RMDs” as they are often called, are the distributions you must take annually from your Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s, 457s, and other “qualified” retirement accounts. In general, “qualified” accounts are employer-based retirement plans into which you, or your employer, have contributed “pre-tax” money. IRAs are often referred to as “qualified” accounts, as well. These types of accounts “qualify” for special tax treatment under our tax code.
Under current tax law, your first RMD must be taken by April 1st of the year following the year you turn 70½. Here’s an example to illustrate the steps to figure your 1st year’s RMD: Step 1: Know when you willturn 70½ – let’s assume you turn 70 on June 1st of 2017; that would mean that your first RMD would need to be for 2017 because you turn 70½ before the end of the year; Step 2: Know the previous year-end balance of your qualified accounts – let’s assume you have one IRA worth exactly $100,000 at the end of 2016; Step 3: Look up your required “withdrawal factor” – there’s an IRS table for that, but it will probably be easier to use an online RMD calculator, like the one from the Financial Industry Regulatory Authority (FINRA). Just do an internet search for “FINRA RMD calculator.” Step 4: Do the math using the tax table or the calculator. Following these four steps, the RMD is $3,649.64 for someone who has an IRA of $100,000 and who turns 70½ before the end of 2017. Easy, right?
RMDs are required by the end of each calendar year once you are in your 70s, but the first year is a little more flexible. If you want to wait, you can delay taking your first RMD until April 1st of the following year. Of course, if you put off your first RMD, you will be required to take a second RMD in the same year, which could have adverse tax consequences. RMDs are required each year until you deplete the applicable accounts.
Oh, and by the way, the percentage you are required to take out goes up each year. The first year’s percentage is about 3.8%. It’s 4.6% at 75, 5.7% at 80, 7.3% at 85, 9.6% at 90, 13.2% at 95, and 18.9% at age 100. Of course, new calculations need to be done each year using the value of your accounts at that time. The good news is, when you are clear on how RMDs work, you can incorporate them into your overall retirement income plan!