If you have a tax-qualified retirement account and turned 70 1/2 during 2015, you must calculate the required minimum distribution (RMD) for the initial year using the life expectancy as of your birthday in 2015 and your account balance(s) on Dec. 31, 2014.
If you fail to make this initial withdrawal, known as a RMD (required minimum distribution), on or before April 1, the penalty is equal to 50 percent of the amount that should have been withdrawn (or the difference between the required amount and any lesser amount actually withdrawn), plus any regular income tax owed on the required minimum distribution.
As with all tax rules, there are some exceptions. Those with employer-based plans can wait longer to receive their required minimum distribution. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions.
The due date applies to owners of traditional (including SEP and SIMPLE) IRAs, but not Roth IRAs. It also usually applies to participants in various workplace retirement plans, including 401(k), 403(b), and 457(b) plans.
Remember that the April 1 deadline only pertains to the required minimum distribution for the first year after you reach age 70 1/2. For all subsequent years, the distribution must be made by Dec. 31. Accordingly, a client who turned 70 1/2 in 2015 (born after June 30, 1944, and before July 1, 1945) and receives the first required distribution (for 2015) on April 1, 2016, must still receive the second required distribution by Dec. 31, 2016.
We recommend a particular tax-planning technique for those with a RMD requirement who may have their itemized deductions limited or who don’t itemize at all. Those who qualify can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their required minimum distribution obligation.
The great thing about a QCD is that because it reduces page one income on the 1040, it may serve to reduce or eliminate Alternative Minimum Tax (AMT) and lower (or eliminate) the taxable portion of social security benefits and lower the percentage limitation for medical expenses.
Another important aspect of retirement planning is that you can meet the RMD requirement without having to withdraw equally from each account. Thus, if you own 5 IRA accounts, it’s ok to meet the total distribution required by withdrawing from just one (preferably the one making the lowest return).
It’s a given that RMD planning can be complex. So as always . . .
Remember that we’re just a click away when you need help.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.
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