The rules for taking a Required Minimum Distribution ("RMD") from a traditional Individual Retirement Account ("IRA") are vast and complicated, but in this post, we'll review the basics. As a side note, Roth IRAs are not subject to lifetime RMDs.
What is a RMD? A RMD is the minimum amount of money that needs to be withdrawn from an IRA account when a person turns 70 1/2 years old. This is true even if the account holder is still working. For the first RMD, the latest it may be taken is April 1 of the year following when the person turned 70 1/2. For example, if you turned 70 1/2 in March 2013, you may delay taking your first RMD until April 2014. All subsequent RMDs must be taken by December 31, including the year the first RMD is taken. You can take more than the RMD, but consult with your financial advisor to ensure it fits your overall financial strategy. You can also take multiple distributions throughout the year, but the total must be equal to or more than the RMD by December 31.
How is it calculated? A RMD is calculated by dividing the prior December 31 balance by a life expectancy period that the IRS publishes in various tables (i.e. Joint and Last Survivor Table, Uniform Lifetime Table, and Single Life Expectancy Table). The table used depends on who the beneficiary of the account is. The IRA custodian or retirement plan administrator usually does the calculations, but the individual is ultimately responsible for the correct amount. If the amount taken is more than the RMD, the excess may not be applied to future years.
Do I pay taxes? If a RMD is subject to taxation, it is taxed at the person's ordinary income rate in the year the RMD is received. A RMD from a Roth IRA is tax-free. RMD that includes basis that was taxed previously is also not taxed upon distribution.
What if I forget or take too little? The IRA owner is responsible for taking the correct RMD every year. If he neglects to do so, the amount not withdrawn is taxed at a whopping 50% rate. The good news is that this penalty may be waived if it can be shown that the missed RMD was due to reasonable error and that reasonable steps are being taken to rectify the situation.
What if I have more than one IRA account? If a person has more than one IRA account, she must calculate the RMD for each account separately, but may withdraw the total amount from one (or more) account.
What happens to the RMDs when a person dies? In the year the IRA owner died, the RMD is the amount the decedent would have taken. The RMD for subsequent years is be based on the life of the designated beneficiary. If an IRA owner dies before she reaches 70 1/2 years old, a different set of RMD rules come into play. Generally speaking though, the entire IRA must be distributed 1) within 5 years of the IRA owner's death or 2) over the life of the beneficiary starting no later than one year after the owner's death.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
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