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Tips for Taking RMDs

Retirement Planning

April 2, 2016

Tips for taking your Required Minimum Distribution

UPDATE: See this blog post for updated information on the new 2020 COVID-19 CARES Act.‍

With about 10,000 baby boomers reaching retirement age daily, there are many people who will be subject to required minimum distributions (RMD) for the first time this year. Reaching the age of 70 1/2 means individuals are forced to begin taking distributions from their retirement accounts, whether they want to or not.

How do you know if you’re supposed to take your RMD this year or next? The required beginning date for an IRA owner is April 1 of the year following the year you turn 70 1/2. For example, if an IRA owner turns age 701/2 on January 1, 2016, their required beginning date would be April 1, 2017. IRA types that apply to this rule include traditional IRAs, SEP IRAs and SIMPLE IRAs. Roth IRAs are not subject to RMDs.

How to Calculate Your RMD

‍Most people likely assume calculating an RMD is as easy as simple math. However, calculating your RMD is more complicated than you might realize. The first step is selecting the right life expectancy factor. This factor is determined by using the Uniform Lifetime Table provided by the IRS and selecting the factor that corresponds to your age as of the end of the year for which the RMD calculation applies.

For example, if an individual turned 76 on October 12, 2016, they would use 22.0 as a life expectancy factor as referenced in the table at irs.gov. Then divide the account balance as of December 31 of the prior year by the appropriate life expectancy factor to get the RMD total.

But don’t expect your IRA custodian will simply handle your RMD for you. While they may calculate it and provide a total for you, that is where their responsibility ends. There are actually a number of adjustments that may need to be made to a year-end balance that a custodian does not have to take into consideration. As stated on the IRS website, although the custodian may calculate the RMD, the account owner is ultimately responsible for ensuring the correct amount is calculated and withdrawn (Click image to see table)

Delaying your RMD

‍So what if you turn 701/2 and you don’t want to stop working? In such cases, individuals may be able to continue delaying RMDs until the year they retire. There is a working exception that may be applicable. The individual must not own more than 5% of the company they work for and there are other conditions that must be met to be able to delay taking RMDs and qualify for this exception.

As always, it is best to contact your financial advisor and tax professional to assist with RMD options and calculations. If you miss your RMD deadline or miscalculate the amount, the IRS will assess a 50% tax on the amount that was required to be withdrawn, which is a hefty penalty that no one wants.

If you have questions about your RMD or your retirement plan, schedule a call with one of our advisors.

Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

Bayntree Wealth Advisors does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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