How to Navigate Required Minimum Distributions

Traditional IRAs, SIMPLE IRAs, SEP IRAs, and retirement plan accounts such as a 403(b)s and 401(k)s allow for investments to be set aside tax deferred; tax deferred being the key word. Those funds invested grow tax-free until withdrawal, accumulating interest, dividends and capital gains along the way. Although designed to encourage savings, at some point the government wants to start collecting those deferred taxes. They do so by requiring account holders to start taking required minimum distributions from their tax-deferred accounts when you reach 70½ (except for a current employer retirement plans if you’re still working). You generally have to take your RMD by December 31, but you have a grace period for the first year, which extends the deadline for your first RMD until April 1 of the following year.  You’ll have to take your second RMDs by the end of that second year, paying taxes on both distributions. Planning ahead for your first year of RMDs is essential. Taking two RMDs in the second year could change the impact of your tax and missing the deadline can expose you to a 50% tax penalty on the amount missed as well.

If you are still working you do not need to take RMDs from a current employer plan. However you DO need to take those RMDs from your other IRAs and previous employer retirement plans.  Once you stop working you will need to take RMDs from your current plan.

Be aware that IRAs and employer retirement accounts calculate RMDs differently.  Traditional IRAs calculate RMDs separately but the amount can be taken from one IRA.  If you have several 401(k) or 403(b) accounts the amount calculated must be taken out of each account.  Some providers calculate and make these distributions automatically. They often take this distribution pro rata over the investments in the account. To simplify, account owners have the options of rolling over their previous employer's retirement plan accounts into a Traditional IRA.

So how are RMDs calculated?*

At the end of each year your IRA or employer sponsored retirement account value is divided by a life expectancy distribution period based on your age. For example, say your 76 years old and have rolled over all of your past employer retirement accounts into one IRA. At the end of last year it was worth $600,000.

IRA December 31st value of the previous year:                             $600,000

Distribution period from the IRS uniform lifetime table:                 22.0

Required minimum distribution for this year:                       $27,272.73

Trying to figure out how to navigate required minimum distributions can be difficult on your own, especially if you have multiple accounts. Siena Wealth Advisors can assist you through the tax planning and calculations necessary to satisfy your required minimum distributions confidently.

*Note this article is meant to cover a typical RMD scenario and does not encompass all special requirements and situations.