What are required minimum distributions (RMDs)?
Traditional IRAs and employer
retirement plans such
as 401(k)s and 403(b)s offer
several tax advantages,
including the ability to defer
income taxes on both contributions and earnings
until they're distributed from the plan.
But, unfortunately, you can't keep your money
in these retirement accounts forever. The law
requires that you begin taking distributions,
called "required minimum distributions" or
RMDs, when you reach age 70½ (or in some
cases, when you retire), whether you need the
money or not. (Minimum distributions are not required from Roth IRAs during your lifetime.)
Your IRA trustee or custodian must
either tell you the required amount each year
or offer to calculate it for you. For an employer plan, the plan administrator will generally
calculate the RMD. But you're ultimately responsible for determining the correct amount. It's easy to do. The IRS, in Publication 590-B, provides
a chart called the Uniform Lifetime
Table. In most cases, you simply find the
distribution period for your age and
then divide your account balance as of the
end of the prior year by the distribution period
to arrive at your RMD for the year.
For example, if you turn 76 in 2016, your distribution
period under the Uniform Lifetime
Table is 22 years. You divide your account
balance as of December 31, 2015, by 22 to
arrive at your RMD for 2016.
The only exception is if you're married and
your spouse is more than 10 years younger
than you. If this special situation applies, use
IRS Table II (also found in Publication 590-B)
instead of the Uniform Lifetime Table. Table II
provides a distribution period that's based on
the joint life expectancy of you and your
spouse.
If you have multiple IRAs, an RMD is calculated separately for each IRA. However, you can withdraw the required amount from any of your IRAs. Inherited IRAs aren't included with your own for this purpose. (Similar rules apply to Section 403(b) accounts.) If you participate in more than one employer retirement plan, your RMD is calculated separately for each plan and must be paid from that plan.
Remember, you can always withdraw
more than the required amount, but if you
withdraw less you will be hit with a penalty tax
equal to 50% of the amount you failed to
withdraw.
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