What Happens When You Reach the Required Minimum Distribution Age?

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?