What is does “Required Minimum Distribution” mean?
The Required Minimum Distribution, or RMD as it is often called, are minimum amounts the federal government requires you to withdraw from your traditional IRA each year.
When do I begin withdrawing my RMD?
You must begin withdrawing the required minimum distribution from your IRA by April 1st of the year following the year in which you reach the age of 70 ½. For example, if you turned 70 ½ in 2013, you have until April 1st, 2014 to withdraw your RMD.
What happens if I don’t withdraw my RMD as required?
Failure to withdraw your annual RMD subjects you to a federal penalty tax. This IRS excise tax is equal to 50% of the amount you should have withdrawn. For example, if your RMD is $10,000 and you withdraw only $6,000, the penalty is 50% of the additional $4,000 you should have withdrawn, subjecting you to a penalty of $2,000.
Avoid the unnecessary 50% penalty by properly planning for the withdrawal of your RMD.
What if I am younger than age 70 ½ ?
There are some general rules for IRA withdrawals that are critical to understand, even prior to age 70 ½.
Anytime you withdraw money from an IRA or retirement account, you are subject to tax.
If you are under the age of 59 ½, there is an early withdrawal penalty equal to 10% of the amount withdrawn (in addition to the federal and state income taxes).
If you are between ages of 59 ½ and 70 ½, if you withdraw money from an IRA account, you will be subject to federal and state income taxes.
If you are over the age of 70 ½, you must begin withdrawing money from your IRA account (see above for more information).
I turned 70 ½ this year, what are my options?
If you turned 70 ½ in 2013, you are allowed to take your first RMD any time between January 1, 2013 and April 1, 2014. For all future years, you can withdraw that particular year’s RMD between January 1st and December 31st of that year.
This does not necessarily mean you should wait until April 1, 2014 to withdraw your 2013 RMD. If you withdraw your 2013 RMD in 2014, you will still be required to withdraw your 2014 RMD by December 31, 2014; this would result in two IRA distributions in the same year and could increase your overall tax bill.
Proper planning should be done before the end of the year to determine the optimal tax and financial strategy for you. Contact us to discuss your options.