A retirement RMD is probably something you've never heard of. It's actually an acronym for “required minimum distribution.” Many retirees like to keep their money in tax deferred accounts as long as possible.
Unfortunately, the IRS has other plans for your money. At some point, the IRS wants it's fair share and retrieve taxes on your investments. You need to be aware of this if you currently invest in a traditional IRA, SEP IRA, 403 (b) plan, qualified plan account, or a governmental 457 (b) account. It would be nice if there was no regulation on this, but once you hit 70 1/2, the IRS is going to tap into your minimum distribution taxes.
So, What's The Deadline?
The age that the RMD takes effect is 70 1/2. If you're reading this and realize that you're at the age right now, the IRS gives you some cushion to avoid any penalties. Suppose you turned 70 1/2 in 2011. Typically, the deadline would be December 31st, 2011 to take out your minimum distribution. The IRS has extended this period to April 1st, 2012, just in case your forget to take out the minimum amount of money. Also, keep in mind that many employers have special stipulations for these plans and modify the rules that the IRS has in place. Do your research, you'll be glad you did.
Deadline For Receiving RMDs:
- Year you turn age 70.5 – by April 1st of the following year
- All subsequent years – by December 31 of that year
Required Minimum Distribution Calculations
It surprised even me how easy it is to calculate your required minimum distribution. You need to find your fair market value of your retirement account for the previous year. Next, ask the IRS what your distribution period is. A distribution period is a modification from the standard government life expectancy tables. Once you have these two numbers, you divide the fair market value of your account by your distribution period. Voila, you now have your required minimum distribution. This number will be the minimum you will be required to pull out during the current year. It sounds a lot more complicated that it really is!
Here is a look at the distribution tables, we'll follow with an example.
|Required minimum IRA distributions|
|Age of retiree||Distribution period (in years)||Age of retiree||Distribution period (in years)|
|92||10.2||115 or older||1.9|
Example: Let's say Joe Sixpack has just reached his 73rd birthday. At the end of last year Joe, who is unmarried, had an IRA worth$100,000. He would use the Uniform Lifetime Table shown above. It shows that he would have a distribution period of 24.7 since he's 73. So he would divide $100,000 by 24.7 to get his required minimum distribution (RMD) of $4049.
Uh Oh, I Missed The Deadline: RMD Penalties
You know that feeling when you had written down someone's birthday, but then totally forgot about it? Many Americans find themselves in this position when it comes to missing their deadline for required minimum distribution. There is a hefty penalty if you forget your deadline. The penalty isn't fun either, it's at 50% of your required minimum distribution amount. For example, if you have a minimum distribution of $5,000, now the IRS is going to tax you $2,500. Not cool when you're dealing with such big numbers! You worked hard for this money, don't give it away to the IRS. And don't try to only take out a portion of your RMD. The IRS will get you for that too. The balance you left in your account will be taxed at the 50% rate once again. Be smart and make your deadline.
The lesson here is to not forget your deadline when taking out your minimum required distribution. Remember, if you do, the IRS will be swinging by to pick up their taxed portion. Also, I recommend you hire some professional counsel if this stuff makes you confused or nervous. You don't want to take any chances. Better safe than sorry.
To the readers: Have you ever missed a deadline for your RMD? If so, what was the process like? Comment below!