• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

What Happens When You Reach the Required Minimum Distribution Age?

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

When you turn 70 ½ you reach the required minimum distribution age (RMD). That means you must withdraw a certain amount from your IRA and most other retirement accounts as well.

That’s right. Even if you don’t need or want the IRA income, you must take out a minimum amount or the IRS will become rather upset with you. You don’t want that.

I’m going to address all the issues surrounding this topic, but first let’s look at the mechanics of what happens once you turn age 70 ½. We’ll do this by examining a made-up person – Kate. Let’s assume she turned 70 in January and she has IRA money invested in various brokerage firms.

1. Notifications

Since Kate turned 70 in January, that means she will turn 70 ½ in July. As a result, she will receive a letter from every IRA custodian she currently uses. They will inform her that she should take out her RMD before 12/31 of this year. She will get those letters no later than 1/31.

2. When is the real deadline for Kate to take the money?

While everyone encourages Kate to take the money by 12/31 of this year, she really doesn’t have to take it until April 1 of the following year. That’s right. When it’s your first distribution, the IRS is forgiving if you forget. This is because the IRS thinks that once people turn 70 ½ they start forgetting things, so the IRS provides a little leeway. (I started forgetting things when I turned 30 – I wonder if I can get a special IRS ruling…)

Most people don’t “take advantage” of this delay because if they do, they have to take out a double amount the following year. Remember, once you turn 70 ½ you’ll have to take an RMD every year as long as you have retirement assets. So Kate will have an RMD for this year and next year. If she forgets to take this year’s amount, she can take it next year (by April 1) but she’ll still have to take out next year’s RMD too. Of course she’ll have until 12/31 of next year to take next year’s RMD.

3. What happens if Kate doesn’t take out the RMD at all?

Nothing – if you consider a 50% penalty nothing. That’s right. The IRS will tax Kate 50% for the amount she fails to withdraw. The IRS might waive the penalty if she proves that her failure was because of a reasonable error and that she’s corrected it. Still, do you think Kate really wants to depend on the loving kindness of the IRS? I didn’t think so.

4. Who calculates the amount?

Kate has four choices here. First, she can ask her CPA or tax preparer to do the calculation. Second, she can ask her financial advisor. Third, she can ask her IRA custodian to do the math. And if she is a real hands-on person, she can calculate the amount herself by reading IRS publication 590.

(Most people calculate the RMD amount based on the IRS Uniform Lifetime Table. But if your spouse is the only beneficiary of your IRA and he or she is more than 10 years your junior, you can use the IRS Joint Life Expectancy Table instead.)

5. Are all Kate’s plans subject to the RMD?

Yes. Kate’s retirement nest egg is spread out all over town, and she must take RMD’s for all of these accounts – but not from each of the accounts. In other words, if she has two accounts worth $100,000 each and her RMD is $4,700 each, or $9,400 total, the IRS won’t care how she takes the money as long as she does take it. She might take the entire amount of $9,400 from one IRA and leave the other intact, or she might take the money in proportion to the account size, or she might make any arrangement in-between.

She must also take an RMD from all her employer-sponsored plans including profit-sharing plans, 401ks, 403bs and 457 plans (if she has separated from service). And she must also take an RMD from SEPS, SARSEPS and SIMPLE IRAs.

6. Can Kate take out more than the RMD?

Yes. She can take up to 100% of the account value – and pay tax on it of course.

7. How are RMDs taxed?

As ordinary income. Ouch.

Summary

When you reach 70 you only have to take a few easy steps:

a. Be clear on when you’ll reach 70 ½.
b. Get the account values for all your retirement accounts as of 12/31 in the year before you reach 70 ½. (You only need to do this if you calculate the RMD yourself or ask your tax preparer to do it for you.)
c. Calculate the RMD yourself or contact each of the IRA custodians and ask them to calculate your RMD for you.
d. Submit paperwork to the custodian to satisfy your RMD requirement.

Did you know what to do when you started taking your RMDs? What was your strategy? Why?

 

Tweet
Pin
Share1

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a Certified Financial Planner™ with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2021 All Rights Reserved